When you need emergency liquidity but don't want to break investments, two clean options exist: loan against mutual funds (LAMF) or overdraft/loan against fixed deposit. Both let you borrow without selling assets — but they differ significantly in LTV ratios, interest rates, processing, and risk. Here is a complete comparison.
How Loan Against Mutual Funds (LAMF) Works
You pledge your mutual fund units as collateral with a bank or NBFC. The lender creates a lien on the units (you still own them, but cannot redeem them until the lien is released). You receive a credit line (overdraft) or term loan based on the LTV of the pledged units.
- Who can lend: Most major banks (SBI, HDFC, ICICI, Axis) and some NBFCs
- Process: Online application; pledge created through CAMS/KFintech (the RTAs); takes 1–3 days
- Interest: Charged only on the amount drawn from the credit line (overdraft structure), not the total sanctioned limit
- Redemption restriction: Units under lien cannot be redeemed; SIP into the same folio can continue
LTV Ratios for Mutual Fund Pledge
| Fund Category | LTV (Loan-to-Value) | Example: ₹10 lakh MF value |
|---|
| Equity mutual funds / ETFs | 50% | Max loan: ₹5 lakh |
| Liquid / overnight / ultra short-term debt funds | 90% | Max loan: ₹9 lakh |
| Other debt funds (medium/long duration) | 80% | Max loan: ₹8 lakh |
| Hybrid funds (aggressive) | 60–70% | Max loan: ₹6–7 lakh |
SEBI caps LTV at 50% for equity and equity-oriented funds (to account for market value fluctuation). If the NAV drops significantly and the loan crosses the permitted LTV, the lender issues a margin call — you must either repay partially or pledge additional units.
How Loan/Overdraft Against FD Works
Banks offer overdraft facilities or term loans against Fixed Deposits. The FD is marked as lien until the loan is repaid:
- LTV: Typically 90–95% of FD value (the highest LTV available on any asset class)
- Interest rate: FD interest rate + 1–2% (e.g., if your FD is at 7%, loan is at 8–9%)
- Process: Instant at the FD-issuing bank; same-day processing
- FD continues to earn interest: The FD still earns its contracted rate during the loan period
- No prepayment penalty: Can repay anytime; interest charged only on days outstanding
Head-to-Head Comparison
| Parameter | Loan Against MF | Loan Against FD |
|---|
| LTV (equity MF) | 50% | 90–95% |
| LTV (debt MF / FD) | 80–90% | 90–95% |
| Interest rate | 9–13% p.a. | FD rate + 1–2% (typically 8–9%) |
| Processing time | 1–3 days | Same day (at FD bank) |
| Margin call risk | Yes (if NAV drops) | No (FD value is fixed) |
| Asset continues to grow | Yes (MF NAV appreciation continues) | Yes (FD interest continues) |
| Minimum amount | ₹25,000–1 lakh typically | ₹10,000 (most banks) |
| Tax implication | None (pledge is not a sale; no capital gains) | None (FD interest taxable regardless) |
When to Choose Loan Against MF
- Your investments are primarily in equity MFs and you're confident of market stability during the loan period
- You want to preserve investment exposure (equity remains invested and can grow)
- You need a revolving credit line (draw and repay as needed) rather than a fixed loan
- Your FDs are already locked and you don't want to break them (even though FD loan is usually better)
When to Choose Loan Against FD
- You have FDs — almost always the better choice due to: lower interest rate, higher LTV, no margin call risk, instant processing
- You need maximum liquidity from a given asset base (90%+ LTV vs 50% for equity MF)
- You want certainty — FD value doesn't fluctuate, eliminating margin call risk
The Verdict
Loan against FD is almost always superior when you have FDs: lower rate, higher LTV, no margin call, instant processing, and the FD continues earning. The only reason to choose LAMF over FD loan is if you don't have FDs and want to avoid selling equity MFs that have significant unrealised gains.
Tax Implications of Pledging
Pledging mutual fund units or FDs as collateral is not a sale or redemption — it does not trigger capital gains tax. The lien is simply a security interest. Tax arises only when you actually redeem or sell the units. This makes LAMF particularly efficient for investors with large long-term equity holdings where redemption would trigger significant capital gains. See our capital gains guide for details.
Frequently Asked Questions
Does pledging mutual fund units affect SIP or dividend payouts? ▼
Pledging units in a mutual fund folio creates a lien only on the specific units pledged — it does not affect SIP contributions into the same folio (new units purchased via SIP are unencumbered). However, if you have opted for dividend/IDCW payout, dividends from the pledged folio continue to be paid normally. The lien restricts redemption of pledged units only — you cannot sell or redeem those units until the lien is released by the bank upon loan repayment.
What happens if my mutual fund NAV drops significantly while I have a LAMF? ▼
If the NAV of your pledged equity MFs drops enough to push the loan above the permitted LTV (50% for equity), the bank will issue a margin call — requiring you to either (a) repay part of the outstanding loan, (b) pledge additional units to restore the LTV, or (c) the bank may sell/redeem the pledged units to recover the loan amount. The margin call risk is the primary disadvantage of LAMF vs loan against FD. To avoid this, maintain a significant buffer — borrow only 35-40% of your equity MF value even though the bank permits up to 50%.
Is there GST on the interest paid for a loan against mutual funds? ▼
No. Interest on loans (whether against MF, FD, gold, property, or any other asset) is exempt from GST. GST applies on financial services that involve fees or commissions — not on interest income or payments. Processing fees charged by the bank for setting up the LAMF may attract 18% GST, but the interest itself is exempt. The interest expense is also not deductible for personal borrowing — only for loans taken for business or investment purposes (e.g., to invest in income-generating assets).