If you run short of funds due to unexpected medical expenses or simply improving your home or any other requirement. In such conditions, most individuals will choose to take a personal loan, use credit cards or make an investment liquidation. Yes, all of the mentioned solutions may be good to overcome your immediate problems, but they might cause serious trouble in the future.
A personal loan is quite expensive. The average rate for taking a personal loan might vary from 12% to 25% per year, depending on the lender and your current credit history.
Credit card debt is even more painful. In case the total sum is not paid timely, you will need to face annual interest rates ranging between 35% and 45%. Besides that, if you miss the deadline or pay late, you will also have to bear penalty charges and the interest rates will become even higher. Not only will you owe extra money, but your credit history will suffer from that too.
However, there is still a trick: I will try to pay off the loan faster and avoid paying huge amounts of interest. But you should remember that many companies impose prepayment penalties. Therefore, instead of saving your finances, you will have to waste additional money because of this clause.
Ok, but what if I decide to liquidate my investments? Yes, you will have extra funds for some time, but you will fail to achieve your initial goals. On top of that, you will suffer from taxation and penalties associated with early withdrawals of your money.
In fact, there is another solution that often remains ignored: Loan Against Mutual Funds.
What is Loan Against Mutual Funds?
A loan against mutual funds lets you use your mutual fund units as collateral to borrow money from a bank or NBFC. You don’t have to sell or redeem your investments to get these funds—the value of your mutual funds basically backs the loan.
The lender figures out how much they can offer based on how much your mutual fund units are worth at the time. When you take out the loan, the bank or NBFC puts a lien on those specific units. This just means you can’t sell or redeem them until you’ve paid back what you owe.
Instead of pulling money out of your investments—especially if you’ve got long-term plans—you keep your mutual funds growing and compounding. Any SIPs (Systematic Investment Plans) you have running keep going too, so you’re not interrupting your savings. You also pay less interest than you would on a typical personal loan, since this one is secured against your investments.
Repayment is flexible. There aren’t fixed EMIs like with a regular loan; you can repay at your own pace. You won’t get penalized for prepayments either, and you’re free to use the borrowed money however you need to, as long as it’s all above board. The whole process is simpler than most loan applications—you can even do it online with some banks.
Who offers loans against mutual funds?
Plenty of big banks and NBFCs provide this service, both online and offline. For example, SBI, ICICI Bank, and HDFC Bank let you do the whole thing online, no paperwork, often for pre-qualified customers. Just keep in mind: not every lender accepts mutual funds from every asset management company (AMC). Some, like ICICI Bank, will only grant loans on mutual funds registered with CAMS, which is a major mutual fund transfer agency in India.
ICICI Bank, for instance, offers loans starting at Rs 50,000. The upper limit is usually Rs 20 lakh for equity mutual funds and Rs 1 crore for debt mutual funds. Lenders decide the eligible amount based on the current value of the mutual funds you’re pledging, and typically lend 50-70% of equity fund value and 80-90% of debt fund value (this is the Loan-To-Value ratio).
If your mutual funds aren’t on the list of approved schemes with major banks, you aren’t out of options—new-age digital lenders like Dhan, or NBFCs like Tata Capital and Bajaj Finserv, can help. With the Reserve Bank of India expected to lower rates soon and there being plenty of liquidity, interest rates for these loans are competitive—sitting around 10-12% per annum.
When to opt for Loan Against Mutual Funds?
So, when does taking a loan against your mutual funds make sense? Do it only if you really need the money and want to avoid selling your investments or pausing your SIPs. Don’t view this as a way to play the markets. If equity funds are already down—say, they’ve lost about 21% so far in 2025—you’ll only be able to borrow a smaller amount anyway. Worse, if markets drop more, you might get a margin call, meaning the lender will ask for more collateral, or even ask you to repay some of the loan right away, plus you’ll be paying high interest on top of that.
This holds true for debt funds as well. If your debt mutual funds are invested in poor-quality instruments, you might be forced to provide extra collateral if their value drops. But if the markets turn and asset prices bounce back, you won’t have to worry about extra margins or losing your pledged units—your mutual funds are growing again.
How to Apply?
So, how do you apply? The steps are pretty simple, especially online. Head to your lender’s website, log in to your net banking, and enter your personal details. Upload the documents they ask for—usually a consolidated account statement of your mutual fund holdings. Then, pick which investments you want to pledge, agree to the terms, and the money lands in your account.
Closing the loan is also straightforward. As you repay, some lenders even release some of your pledged units. When you’ve fully paid off the loan, the lender tells the fund house to remove the lien, and you get full access to your investments again. But if you can’t repay, the lender can ask the fund house to sell those units to recover what you owe.
Conclusion
To sum up, a loan against mutual funds can help you through a cash crunch without forcing you to break your investments. That being said, always think carefully—consider market conditions, the reasons you need the money, and how you plan to pay it back before deciding to take this route.
