Not every mutual fund can automatically be used as collateral for a Loan Against Mutual Funds (LAMF). The units must be acceptable to the lender or lending programme, and the amount you can borrow depends on the lender's approved scheme list, the fund category, current value and applicable loan-to-value (LTV) limit.
For example, ICICI Bank currently states that its digital LAMF facility is available against selected approved mutual funds and publishes different LTV limits for equity and debt mutual funds. This shows why you should check the lender's current eligible-fund list rather than assume every scheme qualifies.
Which mutual funds can be used for a loan?
There is no single universal list of eligible mutual funds across all lenders.
A lender may assess:
- Fund category
- Specific mutual-fund scheme
- Current NAV and portfolio value
- Whether the units are held in an acceptable form
- Applicant type
- Lender's approved-security list
- Applicable LTV and risk limits
- Existing pledge or lien on the units
Some lenders accept a broad set of equity, debt, hybrid or index funds, while others restrict the facility to selected schemes. Current lender product pages illustrate these differences.
Why isn't every mutual fund automatically eligible?
A mutual fund is a market-linked investment, and its value can change.
For the lender, the pledged units are collateral. The lender therefore needs rules for deciding how much credit can safely be extended against that collateral.
That can lead to different LTVs and eligible-scheme lists across lenders.
For example, ICICI Bank currently states that its digital facility can provide up to 70% of NAV for equity mutual funds and up to 80% for debt mutual funds, subject to its product conditions and approved-fund list. These figures are ICICI-specific, not universal LAMF rules.
How does LTV affect how much you can borrow?
LTV means loan-to-value ratio.
The basic calculation is:
Eligible loan amount = eligible portfolio value × applicable LTV
Suppose you have ₹5 lakh of eligible mutual funds.
If a lender applies a hypothetical 50% LTV:
₹5,00,000 × 50% = ₹2,50,000
If another lender's applicable LTV were 70% for that same eligible portfolio:
₹5,00,000 × 70% = ₹3,50,000
The difference is ₹1 lakh of potential borrowing capacity.
This does not mean the second offer is automatically better. The lender may have a different interest rate, fees, eligible-scheme list, repayment structure or margin requirements.
You can use the MLE Loan Against Mutual Funds option to explore the product and compare your borrowing need with your portfolio.
Are equity and debt mutual funds treated differently?
They can be.
Lenders may assign different LTV limits to different asset categories because their risk and price behaviour can differ.
For instance, ICICI Bank's current digital LAMF page publishes a 70% NAV limit for equity mutual funds and 80% for debt mutual funds, subject to its conditions.
Other lenders may use different limits.
Never apply an LTV from one lender to another lender's product.
Can ELSS, hybrid or index funds be pledged?
It depends on the lender and the specific scheme.
Some current LAMF providers list equity, debt, hybrid and index funds among eligible categories, while individual lenders can maintain their own approved lists and conditions.
For ELSS or other schemes with restrictions, check whether the relevant lock-in has ended and whether the lender accepts that particular scheme.
The safest question to ask is:
“Is my exact mutual-fund scheme eligible for pledge under this lender's current LAMF programme?”
Do not rely only on the fund category.
What happens when you pledge mutual fund units?
A LAMF is a secured borrowing arrangement. You pledge eligible units as collateral instead of selling them.
The units remain linked to your investment account, but the pledge or lien can restrict your ability to freely redeem or otherwise deal with those units until the lender releases the security.
MLE's guide on how pledging mutual fund units works explains the process in more detail.
Can the value of your eligible collateral fall?
Yes.
Mutual-fund NAVs can move up or down. If the market value of pledged units falls, your available collateral value can fall as well.
That matters because the lender's permitted borrowing amount is linked to the value of the collateral and its applicable LTV rules.
For example, suppose:
- Eligible portfolio value: ₹5 lakh
- Applicable LTV: 50%
- Initial borrowing: ₹2 lakh
Your initial LTV is:
₹2,00,000 ÷ ₹5,00,000 × 100 = 40%
If the portfolio falls to ₹3.5 lakh while the loan balance remains ₹2 lakh:
₹2,00,000 ÷ ₹3,50,000 × 100 ≈ 57.1%
Whether that creates a margin requirement depends on the lender's terms and applicable collateral limits. You should understand those terms before borrowing.
MLE's article on what happens when NAV falls on a LAMF covers this risk in detail.
Does borrowing against a mutual fund sell the units?
Normally, a LAMF is structured as a secured loan against pledged units rather than a sale of those units.
That means borrowing itself is different from redeeming your mutual fund investment.
However, if you fail to meet the lender's obligations and the lender invokes the security under the loan agreement, the pledged units may be dealt with according to the applicable terms.
Read the lender's pledge, margin and default clauses before accepting the facility.
How should you check whether your mutual fund is eligible?
Use this checklist before applying:
Identify the exact scheme name. Do not rely only on “equity fund” or “debt fund.”
Check the current approved list. Lenders can maintain their own eligible-security lists.
Check the applicable LTV. It may differ by fund category or scheme.
Check the holding format. The lender may specify how units must be held or pledged.
Check existing liens or pledges. Already-encumbered units may not be available for another loan.
Check the interest and charges. A higher LTV is not automatically cheaper.
Understand the margin/default process. Ask what happens if NAV falls.
What documents or information may be needed?
Requirements vary by lender, but you may need:
- KYC details
- Mutual-fund holding statement or portfolio information
- Bank-account details
- PAN and identity information
- Details of the exact mutual-fund schemes
- Pledge or lien authorisation
The lender may also perform its own credit and eligibility checks.
Should you borrow the maximum amount available?
Not necessarily.
If your actual requirement is ₹2 lakh and your eligible portfolio supports a larger amount, borrowing the maximum can increase interest cost and collateral risk unnecessarily.
Start with the amount you actually need.
Then compare:
Borrowing cost = interest + applicable fees and charges
with the value of keeping your investments intact and the risks of pledging them.
For a simple interest illustration, ₹2 lakh outstanding at a hypothetical 11% annual rate for one full year would generate about:
₹2,00,000 × 11% = ₹22,000
Actual interest can depend on the lender's calculation method, daily utilisation, repayment pattern and product structure.
Use the MLE EMI & Prepayment Calculator where applicable, and check the lender's actual LAMF repayment method because some products operate differently from a conventional fixed-EMI loan.
FAQs
Can I take a loan against any mutual fund?
No. Eligibility depends on the lender and its approved scheme/security list. Check the exact mutual-fund scheme rather than assuming that its category alone makes it eligible.
Is there one standard LTV for all mutual funds?
No. LTV can vary by lender, fund category and scheme. Current lender examples show different LTVs for equity and debt mutual funds.
Can I pledge equity mutual funds?
Some lenders accept eligible equity mutual funds, but the exact approved schemes and LTV differ. Confirm the lender's current list before applying.
What happens if my mutual-fund NAV falls?
Your collateral value can fall, which can reduce the borrowing capacity available under the lender's LTV rules. Depending on the agreement, you may need to reduce the outstanding amount or provide additional eligible collateral.
Can I redeem pledged mutual-fund units?
Pledged units may be restricted from redemption or other transactions until the pledge is released. The exact process depends on the pledge arrangement and lender terms.
Is LAMF cheaper than a personal loan?
It can have a different cost structure because the mutual-fund units provide collateral, but you should compare the actual interest rate, fees, repayment method and collateral risk rather than assuming it is always cheaper.
The bottom line
A mutual-fund portfolio does not automatically qualify for a Loan Against Mutual Funds. The exact scheme, lender-approved list, LTV, holding format and loan terms all matter.
Before borrowing, confirm which units are eligible, calculate how much you actually need, understand what happens if NAV falls, and compare the complete borrowing cost.
If your mutual funds are eligible, explore the MLE Loan Against Mutual Funds option and calculate the borrowing requirement before you pledge your investments.