Loan Against Mutual Funds vs FD in India: Which Is Better?

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

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

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

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.