Top 10 Questions Investors Ask Before Pledging Mutual Funds

Maintaining liquidity while staying invested is a strategic challenge for modern investors. Traditional methods of accessing cash often involve selling units, which interrupts the power of compounding and triggers capital gains tax. A sophisticated alternative that has gained traction in 2026 is the Loan Against Mutual Funds (LAMF). This facility allows you to pledge your existing portfolio to gain access to a credit line or an overdraft.

However, moving from a long-term investment mindset to a credit-leveraged one requires careful due diligence. Before you start the LAMF application, you must evaluate the structural, financial, and risk-related aspects of the product. This article breaks down the essential considerations every investor should weigh to ensure their wealth continues to work for them while meeting short-term capital needs.

1. Maximum Credit Limit for Different Portfolio Categories

The first detail to understand is the Loan-to-Value (LTV) ratio. Lenders do not offer a uniform amount across all mutual fund types because the underlying risk varies. Equity funds are subject to market volatility, leading lenders to maintain a larger safety margin. In contrast, debt funds are more stable and thus command a higher borrowing capacity.

The following table outlines the standard LTV ratios you can expect when you check your eligibility to start the LAMF application:

2. Impact on Dividends and Portfolio Growth

A common concern is whether pledging units halts the growth of the investment. When you pledge your units, you are marking a "lien" in favor of the lender, but the ownership remains in your name. This means your money stays in the market.

If your equity fund grows by 15% during the loan tenure, that appreciation is reflected in your portfolio value. Furthermore, any Dividends (IDCW) declared during the period are credited directly to your bank account, not to the lender. This ensures that your compounding journey remains uninterrupted while you utilize the credit facility.

3. Eligibility Criteria for Specific Schemes

Not all mutual funds are eligible for a lien. Lenders maintain an "Approved List of Schemes" which typically includes funds from top-tier Asset Management Companies (AMCs) that have high liquidity and substantial Assets Under Management (AUM).

• Lock-in Periods: Units under Equity Linked Savings Schemes (ELSS) cannot be pledged during their 3-year mandatory lock-in period.

• Registrar Integration: Most digital platforms require your funds to be registered with CAMS or KFintech to enable seamless, OTP-based lien marking.

• Concentration Limits: If your portfolio is heavily skewed toward a single sectoral or small-cap fund, the lender may reduce the sanctioned limit to mitigate concentration risk.

4. Interest Rate Comparison with Unsecured Debt

One of the most frequent loan against mutual funds FAQs concerns the cost of capital. Since LAMF is a secured loan, the interest rates are significantly lower than those of personal loans or credit cards. While a personal loan might charge anywhere from 12% to 18%, LAMF rates in 2026 typically range between 9% and 11% per annum.

The interest is usually calculated on a daily diminishing balance. Since most LAMF products are structured as an overdraft facility, you only pay interest on the amount you actually withdraw and use, rather than the entire sanctioned limit. This makes it an incredibly cost-effective tool for managing fluctuating business expenses or temporary cash flow gaps.

5. Market Volatility and the Mechanism of Margin Calls

Since your collateral is market-linked, its value fluctuates daily. If the market experiences a sharp correction and your portfolio value drops, the LTV ratio increases. If it crosses a specific threshold (usually 60% for equity), the lender will issue a "Margin Call."

In such a scenario, the borrower is required to either pay back a portion of the principal or pledge additional units to bring the LTV back within the permissible limits. Most lenders provide a window of 2 to 7 days to fulfill this requirement. Failure to do so gives the lender the legal right to liquidate the necessary number of units to recover the excess loan amount.

6. Continuation of Active SIPs During the Pledge

Taking a loan does not mean you have to stop your disciplined investment habits. You can continue your Systematic Investment Plans (SIPs) in the same folios where units are pledged.

The new units generated through your monthly SIPs are considered "free units." They are not automatically pledged and can be redeemed or sold at your discretion. This flexibility allows investors to continue building their future wealth while simultaneously managing their current liabilities.

7. Fees and Transactional Costs Involved

While interest is the primary cost, there are several transactional fees that an investor must account for. These are often one-time or annual charges that contribute to the Annual Percentage Rate (APR).

Standard Fee Structure in 2026

• Processing Fee: A one-time charge ranging from 0.5% to 1% of the sanctioned limit.

• Lien Marking Fee: A nominal fee charged by the RTA (CAMS/KFintech) for each request, usually around ₹50 to ₹100 per folio.

• Stamp Duty: Statutory charges as per state laws, applicable to the loan agreement.

• Annual Maintenance/Renewal: A fee charged if the facility is renewed beyond the initial 12-month tenure.

8. Repayment Flexibility and Tenure Options

Unlike an EMI-based personal loan, LAMF offers superior repayment flexibility. Most products allow for "Interest-Only" payments, where the borrower pays the monthly interest and has the freedom to repay the principal in chunks or as a bullet payment at the end of the term.

Most LAMF facilities have a tenure of 12 months, which is renewable. There are typically no foreclosure or prepayment penalties, which is a significant advantage for those who expect to receive a lump sum in the near future and want to close the debt early.

9. Speed of Disbursement in the Digital Era

The evolution of Fintech has reduced the turnaround time for LAMF from weeks to minutes. In 2026, if your KYC is updated and your mobile number is linked to your mutual fund folios, the process is entirely paperless.

Once you start the LAMF application on a digital platform, the lien marking is authorized via an OTP sent by the RTA. After the lien is confirmed, the funds are usually disbursed into the registered bank account within a few hours. This speed makes it a viable alternative even for emergencies where immediate liquidity is paramount.

10. Process for Unpledging and Releasing Units

As you repay the loan, you don't have to wait until the entire debt is cleared to access your units. Many lenders allow "pro-rata" unpledging. If you have repaid 50% of your loan, you can request the lender to release 50% of the pledged units.

This is particularly useful for rebalancing your portfolio. If a particular sector has outperformed and you wish to book profits, you can pay down a portion of the loan, release those specific units, and then sell them in the open market.

Optimize Your Liquidity with discvr.ai

Managing wealth in a volatile market requires tools that provide flexibility without compromise. At discvr.ai, we have built a B2B-ready infrastructure that simplifies the entire lifecycle of a loan against mutual funds. Our platform provides instantaneous portfolio valuation, high LTV ratios, and a completely transparent fee structure.

Instead of liquidating your high-performing assets, utilize our digital-first approach to bridge your capital requirements. Whether you are looking for an overdraft for business expansion or a quick credit line for personal needs, our technology ensures your wealth stays invested while you stay liquid. Start your Loan Against Mutual Funds application with discvr.ai today and take the next step toward smarter financial management.