Loan Against Mutual Funds: Unlock Cash Without Breaking Your SIP

You've spent 8 years building a mutual fund portfolio. Then a medical emergency, home renovation, or business cash-flow gap hits. The instinct is to redeem — and lose years of compounding plus pay capital gains tax. There's a smarter option: Loan Against Mutual Funds (LAMF).

How LAMF works

You pledge your mutual fund units to a lender (bank or NBFC). They open an overdraft-style credit line — typically 50% of the value for equity funds, up to 80% for debt funds. Your units stay invested and keep earning returns; you pay interest only on the amount you actually draw.

Why it beats a personal loan

• Interest rate: 9–11% p.a. vs 14–24% p.a. on unsecured personal loans.
• Disbursal: fully digital, often within a few minutes to a few hours.
• No prepayment penalty — repay anytime, part or full.
• Your SIPs keep running; your compounding is not interrupted.
• Interest is charged only on the used portion, not the full sanctioned limit.

What it costs

Assume a ₹10L equity portfolio. You can typically get a ₹5L credit line. If you draw ₹2L for 3 months at 10% p.a., you pay ~₹5,000 in interest. Redeeming ₹2L from the same fund would have triggered LTCG tax AND stopped compounding on that amount — often the bigger cost.

When NOT to use LAMF

• For discretionary spending — a vacation or gadget is not worth pledging your future.
• If markets fall sharply, the lender may issue a margin call and force partial redemption.
• For very long durations (2+ years) — a proper loan may be cheaper overall.

Bottom line

Treat LAMF as a strategic emergency line, not a lifestyle credit card. Used correctly, it lets your money work in two places at once — invested in markets AND funding your short-term need.