VoltWiki
← Back to Articles
Engineering•March 19, 2025•By Admin User

Loan Against Mutual Funds (LAMF) in India

LAMFmutual-fundsbasics

Introduction

Loan Against Mutual Funds (LAMF) is a financial product that allows investors to leverage their mutual fund holdings to secure a loan without selling their investments. This option provides liquidity while enabling investors to retain their market exposure.

How Loan Against Mutual Funds Works

LAMF works similarly to a loan against securities. The borrower pledges mutual fund units as collateral to a lender, typically a bank or NBFC (Non-Banking Financial Company). The lender sanctions a loan based on the pledged mutual fund’s value and applicable Loan-to-Value (LTV) ratio.

Key Features of LAMF

  • Loan Amount: The loan amount depends on the LTV ratio, which varies based on the type of mutual fund.
  • LTV Ratio:
    • Equity Mutual Funds: Up to 50% of the Net Asset Value (NAV)
    • Debt Mutual Funds: Up to 80% of the NAV
  • Tenure: Generally flexible, ranging from a few months to several years.
  • Interest Rates: Typically lower than personal loans, but varies based on the lender and the borrower's profile.
  • Pledged Units: Investors continue to earn returns on the pledged mutual fund units.

Benefits of Loan Against Mutual Funds

  • Liquidity Without Selling: Investors can access funds without redeeming mutual fund units, avoiding capital gains tax implications.
  • Lower Interest Rates: Compared to personal loans and credit card loans, LAMF offers lower interest rates.
  • Flexible Repayment: Borrowers can repay the loan as per their financial convenience.
  • No End-Use Restrictions: Funds can be used for personal or business needs.

Eligibility & Documentation

Eligibility

  • Indian residents with mutual fund holdings.
  • Mutual funds should be held in a Demat account (some lenders accept physical units).

Required Documents

  • KYC documents (PAN, Aadhaar, Address Proof)
  • Bank statements
  • Mutual fund statements
  • Income proof (if applicable)

How to Apply for Loan Against Mutual Funds

  1. Choose a Lender: Banks and NBFCs like HDFC Bank, ICICI Bank, and DSP Finance offer LAMF.
  2. Submit an Application: Apply online or offline with the required documents.
  3. Pledge Mutual Fund Units: Units are pledged with the lender, usually through a lien marking with the depository (NSDL/CDSL).
  4. Loan Disbursal: Once approved, funds are disbursed to the borrower's account.

Risks & Considerations

  • Market Fluctuations: A drop in mutual fund value may trigger a margin call from the lender.
  • Loan Recall: If the LTV ratio exceeds the permissible limit, the lender may demand additional collateral or partial repayment.
  • Interest Costs: While lower than personal loans, interest accrues over time.

Conclusion

Loan Against Mutual Funds is a convenient option for investors seeking liquidity without liquidating their investments. However, borrowers should carefully evaluate market risks, loan terms, and their ability to repay before opting for LAMF.

FAQs

1. Can I get a loan against SIP investments?

Yes, but only if the SIP investments have completed a lock-in period and have adequate value.

2. What happens if I fail to repay the loan?

The lender may liquidate the pledged mutual fund units to recover the outstanding amount.

3. Are tax benefits available on LAMF?

No specific tax benefits apply. However, investors avoid capital gains tax by not selling their funds.

Disclaimer: This article is for informational purposes only. Loan terms and conditions may vary by lender.