After a lull over a 6-7-month period, markets have gained back their momentum since the middle of April this year. Chances are your mutual fund portfolio value would have surged over this rallying phase. On the debt side, gilt and long duration funds have done quite well delivering double-digit returns over the past couple of years.
However, if you haven’t been prudent enough in saving for contingencies separately and need cash on an urgent basis, you can make use of your corpus for raising debt.
For those seeking cash for any emergency or to bridge a relatively short-term liquidity crunch, many banks and non-banking financial companies (NBFCs) offer loans against mutual fund units.
From the eligibility, margin percentage, rate of interest, documentation, operational aspects and repayment tenure, there are some key factors to consider before opting for these loans.
There are processing fees, penalties and charges related to sale of securities (in certain cases) that you must be aware of. Read on to get a clear picture of whether loan against mutual funds fits your needs.
Leveraging fund investments
All categories of mutual funds – equity, debt and hybrid – are eligible for loans. Equity (and equity-oriented hybrid) funds are treated differently from debt (and debt-oriented hybrid funds) by the lenders. The processing fees can range from as low as 0.35 per cent of the loan amount to as high as 2 per cent.
Top banks such as ICICI Bank, State Bank of India, HDFC Bank and Bank of Baroda offer 50 per cent of the value of mutual funds as loans. In the case of debt funds, the proportion of loan offered goes up to 75-80 per cent. Thus, there is a 50 per cent margin requirement for equity funds and 20-25 per cent for debt funds.
Note that this margin must be maintained all through the tenor of the loan on the outstanding amount. If there is a shortfall, you will have to pay up and bring the deficit to the allowed level. In case you do not have the money to bridge the margin deficit, units of your mutual fund would be sold by the lender. This will involve additional charges and penalties that can go up to ₹5,000.
Delays in paying the loan instalments can result in penalty charges of 2-5 per cent of the withdrawn loan amount from the total sum sanctioned.
The minimum loan amount varies from ₹25,000 to ₹50,000. There is also a maximum limit for the amount sanctioned as loans. In the case of loan against equity funds, the maximum amount allowed is ₹10-20 lakh. In the case of debt funds or fixed maturity plans, the amount can go up to as much as ₹5 crore.
Despite being secured, loans against mutual funds do not come cheap. The interest rates charged are typically north of 11 per cent and could go up to 11.75 per cent in the case of the top banks.
Many banks also take notice of the credit scores of borrowers to finalise the risk premium on interest rates.
Typically, the loan tenor is for a period of 12 months. It can be extended by paying additional charges, usually ranging from ₹1,000 to ₹5,000.
When any of these extra charges are levied, there is also a GST component to be paid additionally.
Wading through procedures
The primary requirement that the aforementioned top few banks have is that the borrower must be a savings bank account holder before applying for these loans.
Also, the mode of operation of the bank account must be single. The mutual fund holdings must also be single and not in joint mode. Joint bank or mutual fund accounts are not preferred by lenders, with some of them specifying separate conditions and procedures in such cases.
You can apply for these loans via apps or internet banking facilities of ICICI bank, HDFC Bank, Bank of Baroda and SBI if you already have a savings accounts with these lenders.
Typically, the sanctioning of the loan is completely online (done within minutes usually) unless the loan requirement runs to several crores of rupees, in which case a branch visit may be required.
All usual documents such as PAN, Aadhaar, proof of address, proof of identity are required. You must also present your mutual fund holding statement to the lender.
The FATCA (Foreign Account Tax Compliance Act) forms and KYC details have to be filled.
Once you map your account to the mutual funds against which you are looking to borrow, your loan eligibility amount is decided.
Finally, lenders do not lend against schemes of all mutual fund houses. Most lenders have a designated list.
Typically, lenders sanction loans against mutual funds that have CAMS as their registrar and share transfer agent.
ICICI Bank has a detailed approved list of mutual fund schemes in its website. HDFC Bank specifies the top 10 fund houses in terms of assets under management and registered with CAMS for its lending activities. In the case of SBI the list includes the top 20 asset management companies that have CAMS as their transfer agent.
As an investor, it is best to be very cautious with taking loans against mutual funds. Equity schemes, especially, are meant to be long-term investments and not to be treated as leverage instruments.
You must certainly avoid taking loans against mutual funds for applying to IPOs hoping for a listing pop and definitely not for indulging in speculative activities with futures and options.
Published on July 12, 2025