Top 10 Charges Borrowers Should Know Before Taking LAMF

In India, over 40 million unique investors are currently fueling the mutual fund ecosystem, with the total AUM (Assets Under Management) crossing the 70 trillion mark in 2025. While most investors focus on the long-term wealth creation of their SIPs, a growing number of savvy borrowers are now using these units as collateral for instant liquidity.

A Loan Against Mutual Funds (LAMF) is often marketed as a cheaper alternative to personal loans, typically offering interest rates that are 3% to 5% lower. However, the "sticker price" interest rate is rarely the only cost involved. 

If you are planning to leverage your portfolio, you must look beyond the headline rate. To ensure your wealth stays protected, you need to check LAMF charges thoroughly to understand how they impact your overall Internal Rate of Return (IRR).

From processing fees to hidden statutory levies, here are the top 10 charges every borrower should know before taking a loan against mutual funds.

1. Loan Processing Fees

The processing fee is the primary administrative cost charged by the lender to evaluate your application, verify your holdings with the RTA (CAMS/KFintech), and set up the loan account.

Most lenders charge this as a one-time fee during the onboarding process. For digital-first platforms, this fee is often a flat amount, while traditional banks might charge a percentage of the sanctioned limit. It is important to note that this fee is usually non-refundable, even if you do not utilize the entire sanctioned limit.

Key Sub-points on Processing Costs:

• GST Impact: All processing fees attract an additional 18% GST.

• Deduction Method: This fee is usually deducted from the first disbursal or charged upfront.

• Enhancement Fees: If you decide to increase your loan limit later, a fresh processing fee (often ₹500 or more) may apply.

2. Annual Maintenance Charges (AMC)

Unlike a standard personal loan, an LAMF usually functions as an overdraft (OD) facility. Because the lender has to keep the credit line open and revalue your collateral daily, they often levy an Annual Maintenance Charge.

This fee is charged every year to keep the loan account active. Even if your outstanding balance is zero, you might still be billed for the AMC if the lien on your mutual funds remains active. Some lenders waive this for the first year but apply it from the second year onwards to cover the operational costs of managing the lien.

3. Stamp Duty and Statutory Levies

Stamp duty is a state-level charge that is often overlooked by borrowers. Since a loan against mutual funds involves a legal agreement and the pledging of securities, you are required to pay stamp duty as per the laws of the state where the agreement is executed.

These mutual fund loan fees are not set by the bank but by the government. In some states, it is a nominal flat fee (e.g., ₹100 to ₹500), while in others, it could be a percentage of the loan amount (ranging from 0.1% to 0.2%). Failure to account for this can lead to a slight discrepancy in the final amount you receive in your bank account.

4. Pledge Creation and De-pledge Charges

To secure the loan, your mutual fund units must be "lien-marked." This process involves the Registrar and Transfer Agents (RTA) like CAMS or KFintech.

While the lender manages the communication, the RTA charges a fee for marking the lien (pledging) and another fee for removing the lien (de-pledging) once the loan is repaid. For Demat-based mutual funds, your Depository Participant (DP), like CDSL or NSDL, will also charge a fee for every pledge request.

Breakdown of Pledge Related Costs:

• Lien Marking Fee: Typically ₹50 to ₹100 per folio or per request.

• De-pledge Fee: Usually similar to the pledge fee, charged at the time of loan closure.

• Demat Pledge Fees: Approximately ₹32 to ₹60 per ISIN (per scheme) charged by the DP.

5. Daily Interest Accrual on Utilized Amount

The most significant "charge" is the interest rate, but the way it is calculated is unique to LAMF. Most lenders offer an interest-only repayment model where you pay interest only on the amount you actually withdraw, not the total limit sanctioned.

For example, if you have a sanctioned limit of ₹10 lakhs but only use ₹2 lakhs for 15 days, you only pay interest on ₹2 lakhs for those 15 days. This makes the effective cost much lower than a personal loan. However, you must check LAMF charges to see if the lender uses a "Fixed" or "Floating" rate, as the latter can change based on RBI repo rate movements.

6. Penal Interest and Overdue Charges

Since LAMF is a secured overdraft, you are expected to pay the interest monthly. If you fail to pay the monthly interest by the due date, lenders apply a penal interest.

Penal interest is usually much higher than your standard rate, often ranging from 2% to 3% per month on the overdue amount. Additionally, if the market crashes and your collateral value falls below the required margin (LTV ratio), and you fail to "top up" the collateral or pay the difference within the stipulated time (usually 7 days), further penalties or even forced liquidation charges can apply.

7. Bounce Charges for E-Mandates

Most digital LAMF providers require you to set up an e-mandate (NACH) for automated interest deduction. If your linked bank account has insufficient funds on the date of the interest debit, you will be hit with bounce charges.

These charges are levied by both your bank and the lender. A single bounce can cost you anywhere from ₹250 to ₹1,200, depending on the lender’s policy. To maintain a healthy EEAT (Experience, Expertise, Authoritativeness, and Trustworthiness) profile as a borrower, ensuring timely interest payments is crucial to avoid these unnecessary costs.

8. Renewal and Review Fees

LAMF facilities are typically sanctioned for a tenure of 12 months. At the end of the year, the lender reviews your credit history and the quality of your pledged mutual funds to renew the limit for another year.

Some banks charge a "Renewal Fee" or "Review Fee" to extend the facility. This is often a flat fee (around ₹1,000) or a small percentage of the limit. If you are a long-term investor who wants to keep the credit line open for emergencies, you should factor in this recurring annual cost.

9. Foreclosure and Prepayment Charges

One of the best features of most modern LAMF products is the absence of foreclosure charges. Since it is an overdraft facility, you can generally pay back the entire principal whenever you want without any penalty.

However, some traditional banking institutions might still have a "lock-in" period or charge a small fee if the account is closed within the first 6 months. Always read the fine print to ensure you have the flexibility to exit the loan without incurring additional mutual fund loan fees.

10. Valuation and Rebalancing Costs

While not a direct "fee" paid to the lender, there is an implicit cost involved in revaluation. Lenders revalue your portfolio daily. If the NAV of your funds drops significantly, the lender may ask you to pledge more units to maintain the Loan-to-Value (LTV) ratio.

If you don't have extra units to pledge and are forced to pay cash to cover the shortfall, it can affect your liquidity. Some lenders might also charge a small "Request Fee" if you frequently swap your pledged securities (e.g., releasing one fund to pledge another).

Summary Table of Potential Charges

Conclusion

Taking a loan against your mutual funds is a brilliant way to meet short-term needs without disrupting your long-term compounding. However, a "low interest rate" can be deceptive if it's accompanied by high processing fees, annual maintenance costs, and steep bounce charges.

To make the most of your investments, you should choose a transparent partner that minimizes these friction costs. Platforms like discvr.ai provide a streamlined, digital-first experience for LAMF, helping you unlock the value of your portfolio with clear terms and competitive rates.

Would you like to see how much liquidity you can unlock from your current portfolio? Visit discvr.ai today to explore the best LAMF options tailored for your financial goals.