Top 10 Reasons Mutual Fund Loans Are Growing in India

In 2026, the Indian mutual fund industry hit a ₹81 trillion AUM milestone, yet many of the 9.25 crore SIP holders still liquidate assets for cash. Choosing an instant loan for salaried professionals via LAMF avoids 20% STCG taxes and preserves compounding. By pledging units at 9.5% to 11% interest, you bridge down payments or medical gaps without selling. 

The surge in this segment is not merely a trend but a structural change in the credit market. With the Indian mutual fund industry’s Assets Under Management (AUM) crossing the ₹70 trillion mark in early 2025, the sheer volume of pledgeable assets has reached an all-time high.

Investors are increasingly realizing that selling units triggers capital gains tax and exit loads, whereas lending against securities provides a tax-efficient, low-interest alternative. This paradigm shift is being supported by a robust digital infrastructure that makes the entire process paperless and instantaneous.

Understanding the Shift Toward Asset-Backed Credit

The preference for secured credit is rooted in the fundamental principles of wealth preservation. When you opt for a loan against mutual funds, you are essentially creating a bridge for liquidity while your underlying units continue to participate in market growth. 

This is particularly vital in a market like India’s, where equity returns have historically outperformed inflation over long tenures. By choosing lending against securities, borrowers avoid the "opportunity cost" of missing out on a market rally that often follows a period of volatility.

Unlike traditional unsecured products, the eligibility for these loans is predominantly determined by the value of the portfolio rather than just a high credit score. 

This democratization of credit has allowed a wider demographic, from small-scale retail investors to high-net-worth individuals (HNIs), to access funds at a fraction of the cost of a personal loan. The following sections detail the top 10 reasons driving this exponential growth in the Indian market.

1. Superior Cost-Efficiency Over Unsecured Loans

One of the primary drivers for the growth of loans against mutual funds is the significant difference in interest rates. Personal loans often come with interest rates ranging from 12% to 24%, depending on the borrower’s profile. 

In contrast, lending against securities typically offers rates between 9% and 11%. This 3% to 5% spread translates into massive savings over the loan tenure, making it the preferred choice for cost-conscious borrowers.

2. Tax Neutrality and Wealth Preservation

Redeeming mutual funds to meet a short-term need is often a tax-inefficient move. Investors are liable for Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) tax upon redemption. By choosing a loan against mutual funds, the investor avoids triggering a taxable event.

Furthermore, they bypass exit loads, which can be as high as 1% if units are sold before a specific period. Lending against securities ensures that the "power of compounding" remains uninterrupted, as the total number of units in the portfolio stays the same.

3. High Loan-to-Value (LTV) Ratios

The Reserve Bank of India (RBI) and various NBFCs have streamlined the LTV ratios to make these loans more attractive. For equity-oriented funds, investors can typically avail of a loan up to 50% of the Net Asset Value (NAV). For debt-oriented funds, which are considered less volatile, the LTV can go as high as 80% to 90%. 

This high leverage allows investors to unlock significant liquidity while maintaining their core investment strategy through lending against securities.

4. Flexible Overdraft Facilities

Unlike a traditional term loan, where you pay interest on the entire sanctioned amount, a loan against mutual funds often functions as an overdraft facility. Borrowers only pay interest on the amount they actually utilize. For example, if a borrower has a limit of ₹10 lakh but only uses ₹2 lakh for a medical emergency, the interest is calculated only on the ₹2 lakh. This flexibility makes lending against securities an ideal tool for managing working capital or emergency funds.

5. Instant Digital Disbursal

The "Digital India" push has integrated CAMS and KFintech APIs with lending platforms, allowing for real-time lien marking. Today, a loan against mutual funds can be processed in under 15 minutes. 

The paperless journey, from OTP-based authentication to instant credit in the bank account, has removed the friction that was previously associated with secured lending. Lending against securities has effectively become as fast as, if not faster than, most "instant" personal loan apps.

6. Retention of Ownership Benefits

When you pledge your units for a loan against mutual funds, you do not lose your rights as a shareholder or unit holder. You continue to receive all dividends, bonuses, and interest payouts associated with the fund. 

This means the actual cost of the loan is further reduced by the returns generated by the pledged assets. For many, lending against securities feels like a "free" loan if the portfolio’s annual growth exceeds the interest rate charged by the lender.

7. Minimal Impact on Credit Scores

While defaulting on any loan will hurt your credit score, a loan against mutual funds is generally considered "safer" for your credit profile. Since it is a secured asset, lenders are less aggressive with reporting small delays compared to the high-pressure environment of unsecured debt. 

Additionally, because the loan is backed by collateral, it doesn't inflate your "unsecured debt-to-income" ratio, which is a key metric used by banks to determine future loan eligibility.

8. No Foreclosure Charges

Most lenders providing a loan against mutual funds do not levy foreclosure or prepayment penalties. This is a massive advantage for individuals who expect a windfall or a bonus and want to close their debt early. 

In the world of lending against securities, transparency is the norm, allowing borrowers to move in and out of debt without worrying about hidden "fine print" costs that usually plague personal loans.

9. Protection During Market Downturns

Savvy investors use a loan against mutual funds to avoid selling their assets during a market correction. Selling in a "bear market" crystallizes losses and prevents the portfolio from recovering when the market eventually turns green. By choosing lending against securities, an investor can meet their cash needs today and wait for the market to recover before deciding to sell any units in the future.

10. Growing Acceptance Among Small-Cap and Mid-Cap Investors

As the Indian investor base matures, the demand for lending against securities is no longer restricted to large-cap blue-chip holdings. Lenders have expanded their "approved lists" to include various mid-cap and even select small-cap funds, provided they meet liquidity criteria. This expansion has made the loan against mutual funds a viable product for a much larger section of the 40 million+ unique mutual fund investors in India.

Mutual Funds Loan Growth Trends in 2026

The trajectory for loans against mutual funds in India is clearly upward, influenced by several macroeconomic shifts. As of 2026, the industry has seen a massive influx of retail participants who treat their investment portfolios as dynamic credit lines. 

The MF loan growth trends indicate that the market for secured retail credit is expanding at a CAGR of 25%, significantly outpacing traditional gold loans in urban centers. This growth is fueled by the rapid digitization of lien-marking processes, which were previously cumbersome.

Another significant factor in the MF loan growth trends is the rising awareness of capital gains tax. Investors are now more calculated, choosing to apply for an MF loan option rather than redeeming units and losing 12.5% or more in taxes. With the total Mutual Fund AUM crossing the ₹75 trillion mark, the "pledgeable" pool of assets has created a new gold mine for NBFCs and digital lending platforms.

• Increased Penetration: Reach into Tier 2 and Tier 3 cities via mobile-first lending apps.

• Institutional Support: Greater participation from PSU banks offering competitive rates for lending against securities.

• Product Innovation: Introduction of "Instant Credit Lines" that act like credit cards but are backed by MF units.

Why Investors Should Apply for an MF Loan Today

Deciding to apply for an MF loan is no longer a desperate move for cash but a strategic treasury management decision for individuals. When you apply for an MF loan, you gain the ability to manage cash flow mismatches, such as paying for a child's school fees or a sudden medical bill, without interrupting the compounding of your long-term wealth. The barrier to entry has dropped significantly, making it easier than ever to apply for an MF loan via secure, encrypted digital portals.

By the time you choose to apply for an MF loan, the systems are already in place to fetch your portfolio data from CAMS/KFintech securely. This ensures that the process of lending against securities is not just fast, but also highly accurate regarding valuation. For anyone with a portfolio exceeding ₹50,000, the option to apply for an MF loan serves as a vital emergency buffer that costs nothing until used.

Conclusion

The evolution of the Indian credit market highlights a clear winner: asset-backed lending. The surge in loans against mutual funds is a testament to the fact that Indian investors are no longer just savers; they are sophisticated managers of their own capital. 

By choosing lending against securities, you aren't just borrowing money; you are making a strategic financial decision to protect your future wealth while solving today’s needs. The current MF loan growth trends suggest that this will soon become the primary way for middle-class India to access credit.

If you are looking to unlock the potential of your investments without selling them, discvr.ai offers a seamless LAMF product designed for the modern investor. Their platform simplifies the journey of lending against securities, providing you with instant liquidity at competitive rates. Take control of your financial journey and apply for an MF loan through a platform that understands the value of your compounding.