Lending against securities (LAS) allows you to treat your investment portfolio as a dynamic credit line rather than a locked vault. By opting for a loan against mutual funds (LAMF), you can access liquidity at rates typically ranging from 9.5% to 11% p.a., effectively preserving your wealth-compounding journey.
While a loan against mutual funds offers the dual benefit of market participation and immediate liquidity, the "last-mile" operational execution remains a challenge for many traditional lenders. From data silos between registrars to rigid valuation models, these hurdles can delay capital access when it is needed most. Identifying and understanding these bottlenecks is essential for any borrower looking to optimize their financial strategy and resolve LAMF issues before they impact business operations.
Top 10 Operational Issues in the Mutual Fund Loan Journey
The operational efficiency of a loan against mutual funds depends on a perfectly synchronized dance between three entities: the lender, the Registrar and Transfer Agents (RTAs) like CAMS or KFintech, and the borrower. When this synchronization breaks, it leads to common LAMF problems that can stall disbursements for days.
1. Latency in Lien Marking and Confirmation Cycles
The backbone of lending against securities is the lien, a legal claim marked on your units that prevents them from being sold while the loan is active. In many legacy systems, this process is still semi-manual. The lender sends a request to the RTA, which then validates the holdings before marking the lien.
The operational lag here can range from 24 to 72 hours. For an enterprise needing funds for a time-sensitive market opportunity or payroll, this delay is more than a minor inconvenience; it is a loss of agility. Until the lien confirmation is received digitally, the loan remains in "provisional sanction" status, and no funds are disbursed.
2. Discrepancies in Loan-to-Value (LTV) and Haircut Calculations
When opting for a loan against mutual funds, borrowers expect a specific percentage of their portfolio value as credit. Per regulatory standards, equity funds usually allow up to 50% LTV, while debt funds can go up to 80%. However, operational issues often arise when lenders apply "internal haircuts" over and above the regulatory limits.
Asset Class | Standard LTV | Internal Haircut (Operational) | Realized Liquidity |
Blue-chip Equity Funds | 50% | 5% - 10% | 40% - 45% |
Liquid/Debt Funds | 80% | 2% - 5% | 75% - 78% |
Sectoral/Thematic Funds | 50% | 15% - 20% | 30% - 35% |
These discrepancies often surface only at the final disbursement stage, leading to a "liquidity shock" where the borrower receives significantly less capital than planned.
3. Limited and Rigid "Approved Security" Lists
Not all mutual funds are created equal in the eyes of a lender. Most institutions maintain a static list of "approved schemes" for lending against securities. If your portfolio consists of high-performing but "niche" funds, such as mid-cap or specific thematic funds, you might find them excluded from the eligibility list. This operational rigidity forces borrowers to either switch funds (triggering capital gains tax) or settle for a smaller loan amount, complicating the effort to resolve LAMF issues effectively.
4. Fragmented Data Syncing with RTAs
A seamless loan against mutual funds requires a real-time fetch of your consolidated account statement (CAS). Operational friction occurs when there is a mismatch in the mobile number or email ID registered with the AMC versus the one used for the loan application. These "data silos" often result in the system being unable to fetch folio details, leading to manual document uploads and physical verification, which defeats the purpose of a digital-first product.
5. Inefficient Margin Call Management
In lending against securities, the collateral value is market-linked. During a market correction, if the NAV of your pledged units drops, the LTV ratio may exceed the permissible limit. The operational failure here lies in the "alert and action" cycle. Many lenders do not have real-time margin call triggers, leading to situations where a borrower is suddenly informed that their units are being liquidated because they didn't top up the margin within a 24-hour window they weren't aware of.
6. Complex Digital Authentication for Joint Accounts
While individual folios have benefited from "one-click" journeys, joint holdings remain an operational bottleneck for a loan against mutual funds. Most platforms are not architected to handle multi-party OTP authentications or simultaneous digital consents from all holders. This often pushes the journey back to physical "wet signatures" and courier-based processing, extending the turnaround time (TAT) from hours to weeks.
7. Errors in Overdraft Interest Accruals
Most lending against securities products are offered as an overdraft (OD) facility. You should only pay interest on the amount you use. However, operational glitches in legacy core banking systems sometimes lead to "commitment charges" on the unutilized portion or incorrect interest calculations on the daily reducing balance. For a business utilizing a large credit line, even a 0.25% error in calculation can lead to substantial financial leakage over a year.
8. Handling of Dividends and Corporate Actions
One of the major draws of a loan against mutual funds is that you continue to receive dividends. However, the operational handling of these payouts can be problematic. If units are lien-marked, some systems mistakenly block the payout of dividends to the borrower's account, holding them in a "suspense account" until the loan is closed. This deprives the borrower of the cash flow they are rightfully owed while the units are pledged.
9. Lack of Real-Time Portfolio Revaluation
Markets move by the second, but many lending against securities platforms revalue collateral only once a day after the NAV is declared. This lack of dynamic revaluation means that if your portfolio value increases by 5% during a market rally, your available credit limit does not update instantly. This operational lag prevents borrowers from maximizing their borrowing power during bullish market phases.
10. Cumbersome Loan Closure and Lien Removal
The final hurdle in the loan against mutual funds journey is the exit. Once the loan is repaid, the process of removing the lien should be instantaneous. In reality, the "No Dues Certificate" (NDC) generation and the subsequent instruction to the RTA to release the units can take 7 to 10 working days. During this period, the investor's capital remains locked, preventing them from selling or rebalancing their portfolio even though the debt is cleared.
Strategies to Resolve LAMF Issues
To overcome these common LAMF problems, borrowers must move away from traditional banking "paper-heavy" mindsets and embrace platforms that offer deep-tech integrations. Here is how you can proactively resolve LAMF issues:
Audit Your Portfolio: Ensure your contact details (Mobile/Email) are updated across all folios with CAMS and KFintech to ensure a smooth data fetch.
Diversify Collateral: Instead of pledging only equity funds, use a mix of debt and equity to buffer against margin calls during market volatility.
Choose API-First Lenders: Opt for lenders that have direct API integrations with RTAs for near-instant lien marking and removal.
Monitor LTV Ratios: Always keep a 10-15% "cushion" in your borrowing. Do not exhaust your entire eligibility; this protects you from forced liquidation during minor market dips.
Conclusion
The world of lending against securities requires a balance of market insight and operational awareness. While a loan against mutual funds is an excellent way to maintain your long-term wealth strategy while meeting short-term liquidity needs, the journey is only as smooth as the technology powering it. By identifying the top operational bottlenecks, from lien marking delays to fragmented data, you can better prepare your portfolio and choose the right partners to resolve LAMF issues before they arise.
In an era where capital agility is paramount, you cannot afford to have your assets tied up in "operational limbo." Transitioning to a tech-driven approach ensures that your wealth remains a tool for growth, not a source of friction.
Ready to experience a frictionless credit journey? Discover how discvr.ai is revolutionizing the loan against mutual funds experience with instant lien marking and real-time portfolio tracking.