What is a Loan Against Mutual Funds and How Does it Work?

Over the past few years, there has been phenomenal growth in mutual fund investments. In fact, the mutual fund industry has expanded over sixfold in the past decade, rising from Rs. 11,87,000 crore in 2015 to Rs. Rs. 75,61,309 crore in 2025, reflecting strong investor participation and deepening financial inclusion. While experts recommend investing for the long term to achieve your long-term goals and reap healthy returns, many investors end up redeeming their funds early during sudden financial emergencies.

Table of Content

• What is a Loan Against Mutual Funds?
• What Are the Key Benefits of a Loan Against Mutual Funds?
• Eligibility Criteria for a Loan Against Mutual Funds
• How to Get a Loan Against Mutual Funds?
• Factors to Consider While Applying for a Loan Against Mutual Funds

But what if you could access liquidity without actually selling your mutual fund? That’s exactly where loans against mutual funds come into play, allowing investors to use their mutual fund units as security to borrow cash from a bank or Non-banking Financial Company (NBFC).

Here is all you need to know about loans against mutual funds:

What is a Loan Against Mutual Funds?

A loan against mutual funds is a type of loan that allows you to pledge your mutual fund units as collateral to borrow cash without selling the investments. This way, you can continue earning the potential returns while accessing liquidity for short-term needs. But remember that you cannot redeem your mutual fund investments until you repay the loan.

You can avail a loan against mutual funds online through banks, Non-Banking Financial Companies (NBFCs), and similar institutions.

What Are the Key Benefits of a Loan Against Mutual Funds?

• Lower Interest Rate: The interest rate of a loan against mutual funds is generally lower compared to personal loans, as these loans are secured against collateral. This lowers lenders’ risk, allowing them to offer better rates to the borrowers.
• Your Investments Keep Growing: A main benefit of this type of loan is that your mutual funds will continue to grow even when you use them as collateral. This allows you to solve your short-term financial needs while not affecting your long-term goals.
• Credit Score Stays Safe: Since mutual funds are used as security, getting the loan approved generally does not impact your credit score. In fact, if you repay the loan on time, it can improve your credit score.
• Quick Access to Loans: Compared to other types of loans, these loans are approved quickly, requiring minimal documentation. This makes them ideal for those who require quick cash for personal expenses or emergencies.

Eligibility Criteria for a Loan Against Mutual Funds

Eligibility for a loan against mutual funds varies by lender, but generally requires you to:

• Be an Indian resident
• Be salaried or self-employed
• Pledge mutual funds worth at least INR 50,000
• Be within 18-21 years of age

How to Get a Loan Against Mutual Funds?

Here is the step-by-step process of how you can get a loan against mutual funds:

• To begin the process, choose a lender that offers a loan against mutual funds service.
• Fill out the application form, either online or in-branch.
• Submit all the required documents, such as:
  • KYC documents (Aadhar, passport or voter ID)
  • PAN Card
  • Consolidated Account Statement (CAS) of your mutual funds
• The lender will mark a lien on your mutual fund units.
• Once the verification is done, the loan will get approved and disbursed to your account.

Factors to Consider While Applying for a Loan Against Mutual Funds

Here are some crucial factors to keep in mind while applying for a loan against mutual funds:

• LTV Ratio: A Loan-to-Value ratio can help you determine how much loan you can avail compared to your mutual fund investment value.
• Interest Rate: Compare the interest rates of the loan among different lenders to get the best deal.
• Repayment Flexibility: Ensure that you are getting repayment flexibility by considering the tenure, EMI structure, and prepayment option the lender is offering.
• Eligibility: Not all mutual funds are accepted for the loan. Talk to your lender to determine your eligibility.
• Market Fluctuation Risk: The market fluctuations can impact your NAV, which in turn can affect your loan eligibility or trigger a margin call.

Suggested Read: Understanding How Mutual Funds Work: A Complete Guide

Consider using a loan against mutual funds calculator to get an estimate of your eligible loan amount, applicable interest rate, and potential monthly interest payments.

In conclusion, a loan against mutual funds is a great financial tool that can help you borrow funds and meet your urgent financial requirements. Compared to other loan options, such as personal loans, these loans offer better interest rates, flexibility, and quick access. However, be sure to repay your loan entirely so you can redeem your mutual funds and capitalize on the profits.

Don’t have mutual fund investments yet? It’s never too late to start investing. At Muthoot Finance, we offer a wide range of mutual fund plans, allowing you to find the perfect fit for your financial goals. Visit our website or consult with our financial experts for personalised guidance.