Nowadays, an investment portfolio is no longer just a vehicle for long-term wealth creation. For enterprises and high-net-worth individuals, it has evolved into a strategic liquidity engine, one that can be tapped without disrupting compounding or triggering tax events.
This shift is visible in the data. In India, loans against securities (LAS) and loans against mutual funds (LAMF) have grown at a 25–30% CAGR over the last three years, driven by rising market participation and the need for short-term, non-disruptive liquidity. For many borrowers, accessing capital at interest rates of 8.5%–11%, compared to 14%–24% for unsecured credit, has become a material balance-sheet advantage.
But not all investment assets are equally bankable.
When evaluating a loan against mutual funds, lenders don’t just look at NAV and portfolio quality. They scrutinize the status of the units themselves, specifically whether they are “free” or “locked-in.” This single distinction often determines credit eligibility, sanctioned limits, and disbursal timelines.
“Free” units, such as open-ended equity, debt, or hybrid mutual funds with no lock-in, typically qualify for Loan-to-Value (LTV) ratios of 50%–70%, depending on volatility and fund category. In contrast, locked-in units, like ELSS funds with a three-year statutory lock-in, are either completely ineligible or accepted at sharply reduced LTVs, often below 40%, if accepted at all.
For enterprises and promoters, this has real-world consequences.
A liquidity plan built on the assumption that all mutual fund holdings are borrowable can quickly collapse during critical business cycles, quarter-end cash gaps, seasonal working capital spikes, or acquisition timelines. Industry data suggests that over 30% of last-minute LAMF rejections in India occur due to unit lock-in constraints, not credit risk.
Understanding these nuances is no longer optional. Lending against securities works best when collateral quality, unit status, and timing are aligned. Done right, it allows capital to remain productive, even when portions of a portfolio are technically restricted.
In a market where liquidity agility often defines competitive advantage, knowing which assets truly unlock borrowing power can be as valuable as the investments themselves.
The Concept of Borrowing Power in Modern Finance
Borrowing power represents the maximum credit limit a lender is willing to extend based on the current market value and liquidity of your pledged assets. In the context of a loan against mutual funds, this power is traditionally determined by the Loan-to-Value (LTV) ratio. Typically, equity-oriented funds attract an LTV of up to 50%, while debt-oriented funds can command as high as 80%.
However, the primary constraint on your borrowing power is the "pledgeability" of the units. For a financial institution to provide lending against securities, it must be able to mark a lien on the assets. If units are subject to a statutory lock-in, they are legally "frozen," meaning they cannot be used as collateral. This effectively reduces your available credit to zero for those specific units until the lock-in expires.
Let’s look at the factors defining your credit ceiling:
1. Priority of Asset Liquidity
The most fundamental rule of lending against securities is that only "free" units are eligible for a lien. This means any units currently tied up in statutory periods, such as the three-year mandate for ELSS or the specific duration of close-ended schemes, cannot be used as collateral.
Lenders must have the legal right to liquidate assets in case of a default, a right that is blocked by a lock-in. Consequently, the lock-in impact on loans is absolute; these units are essentially invisible to the lender’s calculation until the day the restriction expires.
2. Impact of Fund Classification
Your choice of asset class significantly dictates your borrowing capacity. In a loan against mutual funds setup, high-volatility equity funds are viewed as riskier, usually resulting in a Loan-to-Value (LTV) ratio of around 50%.
In contrast, stable debt instruments often command LTVs as high as 75% to 80%. This differentiation reflects the lender's need to protect against market crashes. By holding a higher percentage of debt or liquid funds, you can effectively unlock borrowing power that might be restricted if you held only aggressive equity schemes.
3. Adherence to Approved Security Lists
Lenders do not accept all mutual funds as valid collateral. Most financial institutions maintain a strict "Approved Security List" or whitelist consisting of specific Asset Management Companies (AMCs) and schemes with proven track records of liquidity and performance.
If your capital is parked in a niche or small-cap fund that isn't on this list, it will not contribute to your lending against securities limit. Always verify that your primary holdings are part of these whitelists to ensure your portfolio is ready for immediate leverage.
How Lock-In Periods Restrict Lending Against Securities
A lock-in period is a mandatory timeframe during which an investor cannot redeem or sell their mutual fund units. The most prominent example is the Equity Linked Savings Scheme (ELSS), which carries a 3-year lock-in period. During this window, these units are invisible to the lien-marking system used by lenders.
The lock-in impact on loans is absolute: if the units cannot be sold by the lender in the event of a default, they cannot serve as security.
Consequently, a portfolio worth millions might offer negligible borrowing power if the bulk of the investments are recently made tax-saving instruments. To unlock borrowing power, an investor must wait for the maturity of each specific unit's lock-in duration.
Lock-In Durations and Their Impact on Collateral
Fund Type | Lock-In Duration | Eligibility for LAMF | Borrowing Power Impact |
ELSS (Tax Saver) | 3 Years | Post-lock-in only | 0% weightage for the first 36 months |
Retirement Funds | 5 Years (typically) | Post-lock-in only | Long-term restriction on credit access |
Open-Ended Equity | None | Immediate | Immediate 50% LTV availability |
Debt Mutual Funds | None | Immediate | Immediate 80-85% LTV availability |
The Strategic Importance of Loan Against Mutual Funds for Liquidity
For businesses, the primary utility of lending against securities is maintaining market exposure while accessing working capital. If you have units that have cleared their lock-in period, they become potent instruments for liquidity.
Instead of selling high-performing ELSS units the moment they become free, you can use them as a "key" to unlock borrowing power.
By opting for a loan against mutual funds, you avoid the opportunity cost of missing out on market rallies. This is a "have your cake and eat it too" scenario where your investments continue to earn dividends and capital appreciation, while the credit line helps manage short-term cash flow needs.
Why Enterprises Choose LAMF over Unsecured Credit
Lower Cost of Capital: Interest rates for lending against securities are significantly lower than personal or business loans.
Operational Flexibility: Most loan against mutual funds products operate as an overdraft, where you pay interest only on what you use.
Speed of Execution: Digital platforms can process a loan against mutual funds in minutes, provided the units are not locked.
Preservation of Tax Benefits: Pledging units for lending against securities is not a sale; therefore, it does not trigger capital gains tax.
Calculating Your Borrowing Power with Locked-In Units
To accurately unlock borrowing power, you must conduct a "Free Unit Audit." Modern fintech platforms for lending against securities automate this by fetching your consolidated account statement (CAS) and filtering out units that are currently under lock-in or have existing liens.
Suppose a portfolio is valued at ₹50,00,000, but ₹30,00,000 consists of ELSS units purchased within the last two years. In this case, the lock-in impact on loans reduces your collateral base to ₹20,00,000. If these are equity units, your maximum loan against mutual funds limit would be ₹10,00,000, despite having a much larger total portfolio.
Here are some of the strategies to enhance your credit limit:
Installment Tracking: In SIP-based ELSS, every installment has its own 3-year clock. Regularly check which batches are "maturing" into free units to unlock borrowing power incrementally.
Strategic Allocation: Balance your portfolio with open-ended debt or equity funds to ensure you always have a baseline of liquidity via lending against securities.
NAV Optimization: Since the limit for a loan against mutual funds is a percentage of the current NAV, your borrowing capacity naturally expands as your portfolio grows.
The Mechanics of Lien Marking in Lending Against Securities
Lien marking is the legal process that enables lending against securities. When you apply for a loan against mutual funds, the lender sends a request to the Registrar and Transfer Agent (RTA), like CAMS or KFintech, to "freeze" the units. This freeze prevents the investor from redeeming the units but does not transfer ownership.
Locked-in units cannot be lien-marked because the RTA's systems are programmed to reject any "encumbrance" requests during the lock-in period. Once the lock-in period ends, the lock-in impact on loans disappears, and the units can be instantly pledged to unlock borrowing power.
The Digital Onboarding Journey
Portfolio Discovery: The lender uses your PAN to fetch real-time data on your holdings.
Free Unit Identification: The system identifies units eligible for lending against securities.
Digital Authorization: You provide consent via an OTP to mark the lien.
Instant Limit Activation: The loan against mutual funds limit is set in your account for immediate use.
Risk Management in Loan Against Mutual Funds
While lending against securities is a robust financial tool, it requires diligent management. The most significant risk is market volatility. If the NAV of your pledged units drops sharply, your LTV might exceed the permissible limit, triggering a "Margin Call."
In such cases, you must either pledge additional free units or repay a portion of the loan against mutual funds to restore the required margin. Understanding this risk is crucial when you unlock borrowing power, as it ensures you don't face forced liquidation during a market downturn.
1. Practice Conservative Pledging
While it is tempting to maximize your credit line, you should avoid utilizing 100% of your sanctioned limit for lending against securities. Market volatility can cause the Net Asset Value (NAV) of your funds to drop overnight.
If you have exhausted your entire limit and the market dips, you may face an immediate margin call, requiring you to deposit cash or pledge more units on short notice. Maintaining a utilization buffer of 20% to 30% provides a safety net, ensuring your loan against mutual funds remains healthy during temporary market corrections.
2. Ensure Frequent Monitoring
Active oversight is crucial to stay ahead of the lock-in impact on loans. As time passes, units previously restricted in ELSS or closed-ended schemes gradually transition into "free" units.
By tracking these dates, you can add these newly liberated units to your collateral pool, effectively increasing your limit. Regular monitoring also allows you to swap volatile equity units for more stable debt units, keeping your borrowing power consistent regardless of external economic shifts.
3. Leverage Diversified Pledging
To protect your liquidity, avoid pledging units from a single fund or asset class. Pledging a balanced mix of debt and equity units for a loan against mutual funds creates a stabilizing effect.
While equity offers growth, debt funds provide a higher LTV and lower price volatility. This diversification ensures that a sharp decline in the stock market doesn't lead to a drastic reduction in your overall borrowing power, allowing the debt portion of your lending against securities to act as a stabilizer.
Conclusion
The ability to unlock borrowing power is the hallmark of a sophisticated investment strategy. While the lock-in impact on loans presents a temporary hurdle for certain tax-saving and solution-oriented funds, it should not deter you from viewing your portfolio as a liquid resource. By understanding the distinction between free and locked units, you can strategically time your credit requirements and leverage lending against securities to meet both business and personal milestones.
A loan against mutual funds remains the most efficient way to access capital without disrupting the power of compounding. As you plan your next move, ensure your portfolio is structured to provide the liquidity you need, when you need it.
Experience the future of liquidity with discvr.ai. Our platform is designed to help you seamlessly unlock borrowing power from your investments.
Whether you are looking for a loan against mutual funds or complex lending against securities solutions, discvr.ai provides the speed and transparency your enterprise deserves. Discover your true credit potential today.