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Tata Capital > Blog > Loan on Securities > Loan Against Mutual Funds: Everything You Need to Know

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Loan Against Mutual Funds: Everything You Need to Know

Loan Against Mutual Funds: Everything You Need to Know

Investing in mutual funds is a smart idea. But what if we told you your mutual funds could work twice as hard and help you meet financial needs like high-value purchases, medical bills, etc? That, too, without forcing you to sell your mutual funds.

You read that right. You can, in fact, borrow funds by pledging your mutual fund units as collateral without having to liquidate your investments. This loan facility provides you instant access to funds while allowing your investments to continue generating returns.

This article explores the features, benefits, eligibility criteria, and process of availing a loan against mutual funds.

Loan Against Mutual Funds: Meaning & How It Works

A loan against mutual funds allows investors to avail of a loan by pledging their mutual fund units as collateral with a lender. It is a loan facility offered by various financial institutions against the market value of an investor’s mutual fund holdings.

Key Features of Loan Against Mutual Funds

Some key features of a loan against mutual funds are:

1. Lien marking facility: The investor has to contact the mutual fund house and request for a lien to be marked on the mutual fund units in favour of the lender providing the loan. This lien transfer request has to be signed by all the unit holders.

2. Instant loan processing: Once all documentation is completed, the loan processing is done instantly, and funds are disbursed into the investor’s account. This makes it an ideal option to meet urgent financial needs.

3. Eligibility of both debt and equity funds: Units of both debt and equity mutual funds are accepted by lenders as collateral for availing a loan against mutual funds.

4. Loans for first-time borrowers: These loans are extended even to first-time borrowers who may not have any credit history.

5. Loan amount: The maximum loan amount provided depends on the type and value of mutual fund schemes pledged. This limit varies from one lender to another.

Benefits of Loan Against Mutual Funds

Here are the benefits of loans against mutual funds:

1. Instant and convenient access to funds: One of the biggest advantages is the quick and convenient access to funds through online processing. The loan can be availed instantly by pledging mutual fund units and setting a overdraft limit. This is a hybrid term loan. This saves time compared to traditional loan processing.

2. Flexible interest payment: The interest on the loan has to be serviced monthly by crediting the loan account. However, interest is charged only on the utilised loan amount rather than the entire sanctioned amount. This makes the interest cost flexible.

3. Faster availability compared to other loans: The funds from a loan against mutual funds can be credited within a day compared to the longer waiting periods for other loans. This makes it ideal for urgent needs.

4. Lower interest rate: The loan against mutual funds interest rate is lower than interest rates on other loan options like personal loans and credit card loans. This results in lower EMIs and greater affordability.

5. No liquidation of funds required: One of the biggest benefits of a loan on mutual funds is that the investor can avail of a loan without having to liquidate or redeem their mutual fund investments. The units remain in the investor’s demat account.

The below mentioned eligibility, documents requirement and application process may change from vendor to vendor and from time to time.

Also,read – Pros & Cons Of Taking Loan Against Shares

Loan Against Mutual Funds Interest Rates (2025 Update)

Before applying for mutual fund loans, it is crucial to know interest rates.  Typically, loan against mutual fund interest rates will vary widely across different public sector banks, private banks, NBFCs, and other lending institutions. 

Some factors that will affect it include the lender’s policies, the type of mutual fund, and the borrower’s profile (such as their income and credit history). Generally, public and private lenders offer rates ranging from 8 to 10% per annum. Interest rates in NBFCs may be higher, with rates charged up to 20% per annum. To know exact interest rates, it is crucial to check your lender’s policies carefully. 

Eligibility Criteria for Loan Against Mutual Funds

The following investors are eligible to avail a loan against mutual funds:

1. Indian residents who are above 18 years of age can avail this loan.

2. Partnership firms, private trusts, and private and public limited companies who invest in mutual funds can avail of a loan against their mutual fund units.

3. There are no restrictions on the profession or nature of business for eligibility. Salaried individuals, self-employed professionals, etc., are eligible.

4. There is no minimum income requirement for availing of this loan.

Required Documents for Loan on Mutual Funds

The following documents are required by lenders to avail a loan against mutual funds:

1. PAN Card

2. Proof of identity (Aadhaar card/Passport/Driving License/Voter ID)

3. Proof of address (Aadhaar card/Passport/Driving License/Voter ID)

4. Signature verification (PAN card/Passport/Banker’s verification)

Which Mutual Funds are Eligible for Loan?

Mutual fund loan eligibility will vary based on the lender’s policies. However, in most cases, mutual fund loans require borrowers to have units in recognised, lender-approved AMCs. Many financial institutions also accept funds registered with both CAMS and KFintech. However, some financial institutions only provide loans against MFs to CAMS-registered mutual funds. It’s essential to check the eligibility for loans against mutual funds online or at your lender’s physical branch.

Also,read – Loan Against National Savings Certificates (NSC)

Loan Against Mutual Funds Application Process (Online & Offline)

The process of applying for a loan against mutual funds is straightforward:

1. If the mutual fund units are held in physical/statement form, they need to first be dematerialised into electronic/demat form to pledge them for the loan.

2. Investors can apply online for a loan against mutual funds through the lender’s online facility after logging into their account. The online application process and paperless approval make availing of a loan against mutual funds quick and convenient for investors.

3. The lender will verify the investor’s details, mutual fund portfolio and eligibility.

4. After the application is approved by the lender, the loan processing will commence.

5. The lender will request the mutual fund registrar to mark a lien on the specific units that are being pledged against the loan.

6. The registrar sends a lien confirmation letter to the investor with a copy marked to the lender mentioning the units against which the lien has been created.

7. After completion of all documentation and lien marking, the loan amount sanctioned gets credited to the investor’s account.

Conclusion 

There are countless benefits of loans against mutual funds, including short-term liquidity, without having to sell your investments. It is important to note that you must repay your mutual fund loan in full to regain complete control over your MF units. 

However, once the amount is repaid, you can continue to hold or redeem them without additional charges. Loans against MFs are best suited for your urgent financial needs and cash-flow gaps. For further guidance on mutual fund loans, visit Tata Capital’s website today!

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FAQs

What interest rate can I expect for loan against mutual funds in India?

 

Loan against mutual funds interest rates vary based on the lender, their policies, the mutual fund type, and the borrower’s profile. Generally, interest rates range between 8% to 20% per annum.

Can I apply for a mutual fund loan completely online?

 

Yes, many public sector banks, private banks, and NBFCs allow you to fully apply for loans against mutual funds online. 

Is loan against mutual funds better than personal loan for emergencies?

 

Generally, loans against mutual funds are considered beneficial for urgent fund requirements and short-term cash flow. Once the amount is repaid, you can regain full control of your mutual funds.

What happens to my mutual fund units after taking a loan against them?

 

When you take a loan against MF, the fund gets pledged as collateral or security. You cannot redeem the funds or switch units until the entire loan amount has been repaid.

Are there prepayment or foreclosure charges on mutual fund loans?

 

Prepayment and foreclosure charges on loans against mutual funds will vary based on the lender and their individual policies. It is essential to check with your lender regarding other fees and penalties.

What is the minimum CIBIL score for loan against MF eligibility?

 

Usually, the required CIBIL score for secured loans varies by lender. Most require borrowers to have a score of or above 650 for smoother approval.

Can fixed-term/ELSS mutual funds be used for a loan against MF?

 

Yes, many lenders offer options for loans against ELSS mutual funds. However, different financial institutions will have varying policies regarding the same.

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