Can mutual funds be used as collateral for a loan?
Yes, mutual funds can be pledged as collateral to get a secured loan. However, not all mutual funds are eligible, and lenders follow specific criteria before approving a loan against them. Here's a detailed breakdown:
Types of mutual funds accepted
Lenders typically accept the following categories:
- Equity mutual funds – Most commonly accepted due to higher asset value and liquidity.
- Hybrid mutual funds – Partially equity-based, often accepted depending on risk exposure.
- Debt mutual funds – Select schemes may be accepted, especially short-duration or high-credit-rated funds.
- Demat mutual fund units – These are preferred, though some lenders allow non-demat (physical) format after verification.
Conditions from lenders
To be eligible, your mutual funds must meet certain criteria:
- Held with an empanelled AMC – The asset management company should be on the lender’s approved list.
- Minimum value requirement – Some lenders have a minimum NAV or fund value that must be met.
- Loan-to-Value (LTV) – Typically ranges between 80% and 90%, depending on the fund type and market conditions.
- Pledge process – Units must be pledged via NSDL/CDSL or through the respective AMC portal.
Common investor questions answered
- Can I use SIP investments as collateral?
Only the units already allotted from SIP contributions can be pledged. Future SIP instalments are not considered.
- Do I need to redeem my mutual funds?
No, pledging does not involve selling or redeeming the units you retain ownership and continue to earn returns.
- Is the loan amount fixed or flexible?
Most lenders offer a loan limit (overdraft facility), and interest is charged only on the amount utilised.
Advantages of using mutual funds as collateral
- Access to liquidity without selling investments – Investors can meet urgent financial needs without redeeming their mutual fund holdings.
- Lower interest rates compared to unsecured loans – Since the loan is secured by mutual funds, interest rates are generally lower than personal loans or credit card borrowing.
- Continued investment growth – Borrowers benefit from potential capital appreciation and dividend payouts while the mutual fund units remain pledged.
- Flexible repayment options – Lenders offer various repayment plans, including EMIs, bullet payments, and overdraft facilities.
- No impact on credit score if repaid on time – Since the loan is backed by collateral, timely repayment does not negatively impact the borrower’s credit rating.
- Quick loan approval process – Loans against mutual funds require minimal documentation and are processed faster than traditional secured loans.
For more details on this financing option, read our guide on loan against mutual funds.
Considerations when using mutual funds as collateral
- Market volatility risk – Equity mutual funds are subject to market fluctuations, which can affect the LTV ratio and may lead to margin calls from the lender.
- Loan-to-value (LTV) ratio limitations – Lenders offer loans based on a percentage of the mutual fund’s NAV, which may limit the available loan amount.
- Restriction on fund transactions – Pledged mutual funds cannot be redeemed or switched until the loan is fully repaid.
- Potential liquidation by lender – If the borrower defaults or fails to maintain the required margin, the lender may sell the pledged units to recover the loan.
- Impact on investment strategy – Using mutual funds as collateral may disrupt long-term investment plans if the borrower is unable to maintain the pledged funds.
- Interest costs – While interest rates are lower than unsecured loans, borrowers must ensure they can afford the repayment to avoid financial strain.
Types of loans secured by mutual funds
- Term loans – Borrowers receive a lump sum loan amount against pledged mutual fund units with a fixed tenure and repayment schedule.
- Overdraft facility – A flexible credit line where the borrower can withdraw funds as needed, paying interest only on the utilised amount.
- Margin loans – Investors can pledge mutual funds to secure additional funds for trading or investing in stock markets.
- Business loans – Small businesses and self-employed individuals can use mutual funds as collateral to secure working capital or business expansion loans.
- Emergency loans – Instant loans against mutual funds provide quick financial assistance for medical expenses, education fees, or other urgent needs.
Mutual funds as collateral vs Selling mutual funds
When you need quick funds, using mutual funds as collateral is often a smarter alternative to selling them. Both options offer liquidity, but they differ significantly in terms of tax impact, long-term returns, and financial flexibility. Here's a breakdown of how the two compare:
Factor
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Using mutual funds as collateral
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Selling mutual funds
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Tax impact
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No capital gains tax as units aren’t sold
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May trigger short- or long-term capital gains tax
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Ownership and returns
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You retain ownership and continue earning returns
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You forgo any future returns from sold units
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Liquidity
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Quick access to funds without liquidating assets
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Immediate cash, but at the cost of portfolio reduction
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Opportunity cost
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Lower investments stay intact and can grow further
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Higher—you lose compounding and market upside
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Loan cost
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Interest applicable only on used amount (OD-based)
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No loan, but may face reinvestment risk later
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In summary, pledging mutual funds helps preserve long-term wealth while offering flexible credit access, especially when compared to the irreversible financial cost of selling your investments.
Conclusion
Using mutual funds as collateral is a smart financial strategy for investors seeking liquidity without selling their investments. It allows individuals to leverage their existing assets, access funds at lower interest rates, and continue benefiting from market appreciation.
However, borrowers must carefully evaluate the risks associated with market fluctuations, repayment obligations, and restrictions on fund transactions before pledging their mutual fund units. Choosing the right type of loan, understanding the LTV ratio, and maintaining financial discipline can help investors make the most of this financing option without disrupting their long-term investment goals.
