Did you know that, according to recent financial surveys, nearly 25% to 30% of asset-backed loan applications in the digital lending space face hurdles or rejections due to preventable documentation and eligibility errors? While a Loan Against Mutual Funds (LAMF) is one of the most efficient ways to access liquidity without liquidating your portfolio, the approval is not always automatic. 

Understanding why these applications fall through is the first step toward securing the capital you need for your business or personal requirements.

Top 10 Reasons LAMF Applications Get Rejected

When you apply for a loan against your investments, you are essentially asking a lender to trust the value of your portfolio as collateral. Even though the units are "locked," several factors can trigger a red flag in the underwriting system.

1. Pledging Unapproved Mutual Funds

Lenders maintain a strict "Approved List" of mutual fund schemes they are willing to accept as collateral. Generally, highly liquid and well-rated funds from reputable Asset Management Companies (AMCs) are preferred. If your portfolio consists of small-cap funds with low AUM or niche thematic funds that are not on the lender’s approved list, your application will be rejected instantly.

2. Units Under Lock-in Period (ELSS)

Equity-linked savings Schemes (ELSS) are popular for tax saving but come with a mandatory three-year lock-in period. You cannot lien-mark or pledge these units until the lock-in period has expired. Many applicants try to pledge their entire portfolio, including recent ELSS investments, leading to a mismatch in the eligible loan amount and subsequent rejection.

3. Low CIBIL or Credit Score

Although LAMF is a secured loan, lenders still evaluate your creditworthiness. A CIBIL score below 700–750 suggests a history of poor repayment behavior. Lenders fear that even with collateral, a borrower with a low score might default on interest payments, leading to the messy process of liquidating units.

4. Mismatched KYC Details

Digital lending relies on automated verification. If the name on your PAN card does not match the name registered with the RTA (CAMS or KFintech) or your bank account, the system will flag the application as a high risk for fraud. Even a small spelling mistake or a missing middle name can be one of the primary LAMF rejection reasons.

Factor

Description

Impact on Approval

Fund Type

Equity vs. Debt vs. Liquid

Debt/Liquid funds often have higher approval rates.

RTA Sync

Data must match CAMS/KFintech

Instant rejection if records don't sync.

LTV Ratio

Loan-to-Value percentage

Exceeding 50% for Equity usually fails.

5. Existing Lien or Multiple Pledges

You cannot pledge the same mutual fund units to two different lenders. If you have already taken a loan from another bank or NBFC against the same units, the RTA will reject the new lien-marking request. It is essential to ensure that the units you are offering are "free" and not already encumbered.

6. Insufficient Net Asset Value (NAV)

Lenders have a minimum loan threshold, often starting at 25,000 or 50,000. If the market dips right before your application is processed and your portfolio value falls, your eligible loan amount (based on the LTV) might drop below the lender's minimum limit, resulting in a technical rejection.

7. Incomplete Income Documentation

For high-value loans, lenders may look beyond the collateral to your actual repayment capacity. If you fail to provide updated bank statements (usually the last 6 months) or if those statements show frequent cheque bounces and low average monthly balances, the lender may deem you a "risky" profile.

8. Age and Residency Constraints

Most lenders require the applicant to be between 18 and 70 years of age. Additionally, LAMF is typically restricted to Indian residents. Non-Resident Indians (NRIs) often face rejections because the legal and tax implications of lien-marking for NRIs are different and not supported by all digital lending platforms.

9. Incorrect Bank Account for E-Mandate

The success of an LAMF application depends on the "E-mandate" or "NACH" setup for auto-debiting interest. If you provide a bank account that does not support E-mandates or if the account is inactive, the lender cannot ensure timely interest recovery, leading to a cancelled application.

10. Joint Holding Issues

If the mutual fund units are held jointly (e.g., "Accountant & Spouse"), all holders must usually be parties to the loan agreement. If you apply as an individual for units held in a "Joint" or "Anyone or Survivor" mode without the secondary holder's consent or KYC, the application will not proceed.

How to Successfully Reapply for LAMF

If your application was turned down, do not lose hope. You can reapply for LAMF after addressing the specific gaps in your initial submission. The key is to wait for a short period, usually 30 to 90 days, to allow your credit score to stabilize or for your portfolio value to recover.

Steps to Improve Your Chances

  • Audit Your Portfolio: Check the approved list of the lender before selecting units to pledge. Focus on pledging blue-chip equity or liquid funds for higher success rates.

  • Clean Up Your KYC: Ensure your mobile number is linked to your Aadhaar and that your name is consistent across all financial documents.

  • Reduce Other Liabilities: Lowering your current debt-to-income ratio makes you a more attractive borrower, even for a secured product.

  • Verify RTA Records: Log in to CAMS or KFintech to ensure your email and phone number are updated, as the OTP for lien-marking will be sent to these registered details.

When you reapply for LAMF, make sure you are not making multiple hard inquiries with different lenders simultaneously. This can further dent your credit score. Instead, use a specialized platform that streamlines the process and checks your eligibility before hitting the "submit" button.

Why Choose discvr.ai for Your LAMF Needs?

Navigating the complexities of lending shouldn't be a hurdle to your growth. At discvr.ai, we have simplified the Loan Against Mutual Funds journey to ensure that the LAMF rejection reasons mentioned above are mitigated right at the start. Our platform offers a seamless, paperless experience where you can check your eligible limit against approved funds in minutes.

With competitive interest rates and a wide range of approved schemes, discvr.ai ensures that your capital is always within reach. Whether you need funds for a business expansion or a personal emergency, we provide the transparency and speed you deserve.

Ready to unlock the power of your investments? Explore LAMF with discvr.ai today and experience a smarter way to borrow.