How is interest paid on a Loan Against Mutual Funds?
If your Loan Against Mutual Funds (LAMF) is structured as an overdraft (OD), you may not have a fixed monthly EMI like a regular personal loan. Instead, interest is commonly calculated on the amount you actually use and the number of days it remains outstanding.
But do not assume every LAMF works the same way. Some lenders offer an overdraft; others may structure a facility differently. Your sanction letter and loan agreement decide whether you must pay monthly interest, repay principal in instalments or clear the amount by a specified date.
The first question to ask is not just "What is the interest rate?" It is also: When is interest calculated, when is it debited, and from which account must I pay it?
Does interest apply to the full sanctioned limit?
For an overdraft facility that charges interest only on utilisation, the unused portion of the limit does not attract interest while it remains unused.
For example, suppose the lender sanctions an OD limit of ₹5 lakh and you withdraw ₹2.5 lakh. If the product charges interest on the utilised amount, interest is calculated on ₹2.5 lakh—not automatically on the entire ₹5 lakh limit.
ICICI Bank's official Loan Against Mutual Funds page describes its OD facility as charging interest on the utilised amount and for the period it is used. It also states that interest is calculated on the daily outstanding balance and debited to the LAS account on the second working day of each month. That timing is an ICICI Bank product detail, not a universal due date for every lender.
A simple example: interest for 20 days
Assume:
- Amount utilised: ₹2,50,000
- Illustrative annual interest rate: 11%
- Number of days used: 20
- Calculation basis for this example: 365 days
The approximate interest is:
₹2,50,000 × 11% × 20 ÷ 365 = ₹1,507 (approximately)
If the same ₹2,50,000 remained outstanding for 30 days, the illustrative interest would be about ₹2,260.
These are examples using a constant daily outstanding balance. Your lender may use a different day-count convention, value date, rate or debit cycle. The actual amount can also change if you withdraw or repay money during the month. Use the interest calculation and statement issued by your lender for the final figure.
When is LAMF interest debited?
The answer depends on the lender and the type of facility.
For example, ICICI Bank states that interest on its Loan Against Mutual Funds overdraft is calculated on the daily outstanding balance and debited or charged to the LAS account on the second working day of every month for the preceding interest period.
Before accepting another lender's offer, confirm these points:
- Is interest calculated daily or using another method?
- What date starts the interest calculation—request date, value date or actual withdrawal date?
- On which date is interest debited?
- Is it collected from your linked savings account or charged to the overdraft account?
- What happens if the interest debit cannot be collected?
- Are there penal charges or other consequences for an overdue amount?
Do not copy another bank's interest-debit date into your calendar. Use the date in your own sanction terms and account statement.
Is there a fixed EMI on LAMF?
Not always. An overdraft is different from a standard term loan.
| Feature | LAMF overdraft | Regular term loan |
|---|---|---|
| Amount on which interest may be charged | Utilised amount, if the product uses this method | Outstanding principal under the repayment schedule |
| Repayment structure | Interest servicing and principal repayment as per OD terms | Scheduled instalments |
| Principal repayment | May be flexible, subject to lender terms | Usually follows the agreed instalment schedule |
| Available limit after repayment | May become available again, subject to the facility terms | Depends on the loan structure |
| Main document to check | OD sanction letter and facility terms | KFS, sanction letter and repayment schedule |
An OD may give you flexibility, but it does not mean you can ignore the interest debit or keep the balance outstanding indefinitely. Check the renewal date, repayment conditions and any minimum servicing requirement.
What if you do not pay the monthly interest?
The consequence depends on the lender's agreement and how the account is operated. An unpaid interest debit may create an overdue amount or affect the available drawing limit. If the amount outstanding becomes higher than the revised limit, the account may become overdrawn and the lender may require you to regularise it.
There is another risk: the value of pledged mutual fund units can fall. If the lender reduces the eligible limit after revaluing the portfolio, your outstanding amount may exceed the revised limit even if you have not withdrawn more money.
ICICI Bank explains that when a fall in NAV reduces the available limit below the amount already utilised, the borrower may need to pledge additional eligible units or repay the excess. Penal charges may apply to the overdrawn amount under its product terms.
To avoid surprises, monitor both the interest debit and the available OD limit—not just the amount you originally borrowed.
A monthly LAMF interest checklist
Use this routine around the lender's interest-debit date:
- Check the OD statement and note the daily outstanding amount.
- Match withdrawals and repayments with their value dates.
- Compare the interest charged with the lender's calculation.
- Keep sufficient funds in the account from which interest is collected.
- Check whether the interest has been paid, remains due or has been added to the OD balance.
- Review the current NAV and available limit of the pledged units.
- If the market value has fallen, ask the lender how much repayment or additional collateral is required.
- Keep the interest debit confirmation and monthly statement.
If you expect money to arrive later in the month, consider repaying part of the utilised amount earlier where your facility permits it. Reducing the outstanding balance can reduce future interest under a daily-balance method. Confirm the value date and any applicable charges before making the transfer.
LAMF interest vs personal-loan interest
A personal loan generally has a fixed repayment schedule with an EMI that includes principal and interest. An overdraft-style LAMF can charge interest only on the amount used, but it is secured by your mutual fund units and has collateral-related risks.
Do not compare only the headline interest rate. Compare:
- The annual rate and how it is calculated.
- Processing, renewal and other charges.
- How frequently interest is debited.
- Whether principal repayment is flexible.
- What happens if the NAV falls.
- The time and conditions for releasing the lien after repayment.
Read MLE's guide to how LAMF interest is calculated and the margin-call guide. If your facility is approaching its annual review, see what happens when a LAMF overdraft comes up for renewal.
Frequently asked questions
Do I pay interest on the full LAMF limit?
For an overdraft product that charges interest only on utilisation, interest applies to the amount used and the period it remains outstanding. Confirm the calculation method in your own agreement.
Does a Loan Against Mutual Funds have a monthly EMI?
Not necessarily. An overdraft may require interest servicing without a fixed principal EMI. A term-loan structure may have scheduled instalments. Check the facility type before borrowing.
When does ICICI Bank debit LAMF interest?
ICICI Bank states that interest is calculated on the daily outstanding balance and debited or charged to the LAS account on the second working day of each month. Other lenders may use different dates and processes.
Can I repay the principal before the end of the LAMF tenure?
This depends on your lender's terms. ICICI Bank states that part-prepayment of the utilised amount is permitted without charges on its product page. Confirm the applicable conditions for your own facility.
What happens if mutual fund NAV falls?
The lender may reduce the available overdraft limit. If the utilised amount exceeds the revised limit, you may need to add eligible collateral or repay the excess. Review the lender's notice and act within the time stated.
Does unused LAMF limit attract interest?
Under an OD that charges only on the utilised amount, the unused portion does not attract interest while it remains unused. Check whether your particular facility has any separate fees or minimum charges.