When you need quick liquidity for your business or personal needs, the last thing you want to do is sell off your hard-earned investments.
Breaking a Systematic Investment Plan (SIP) or redeeming units can disrupt your long-term compounding goals and potentially trigger capital gains tax. This is where lending against securities becomes a strategic financial tool, allowing you to access capital while keeping your portfolio intact.
By opting for a loan against mutual funds, you essentially pledge your units as collateral to a bank or NBFC. In return, you receive an overdraft limit or a term loan. The beauty of this arrangement is that your investments continue to grow, and you still receive any dividends or capital appreciation. But the most critical question remains: what does it cost?
What Are the Current Interest Rates on LAMF?
Interest rates for a loan against mutual funds in 2026 are significantly more attractive than those of unsecured credit options.
Typically, you can expect interest rates to range between 9% and 12% per annum. Because the loan is secured by your assets, lenders perceive it as a lower risk compared to personal loans, which often start at 13% and can soar up to 24%.
The exact rate you get depends heavily on the type of mutual funds you hold and the institution you choose. Most digital-first lenders and top-tier private banks offer competitive pricing to attract high-net-worth individuals and business owners.
Average Interest Rate Comparison (2026)
Lender Category | Typical Interest Rate (p.a.) | Processing Fees |
Top Private Banks | 9.50% – 11.00% | 0.5% to 1% |
Leading NBFCs | 10.25% – 12.50% | Flat ₹999 to ₹2,500 |
Fintech Platforms | 9.00% – 10.50% | Often Zero or Minimal |
Public Sector Banks | 8.75% – 10.50% | Varies |
Factors That Influence Your Interest Rate
It is important to understand that the interest rate for lending against securities is not a one-size-fits-all number. Lenders evaluate several variables before quoting a final rate. While your credit score matters, the quality and volatility of your underlying collateral are the primary drivers.
1. Asset Class and Volatility
Interest rates for debt-oriented mutual funds are usually lower than those for equity funds. This is because debt funds are less volatile, providing a more stable "cushion" for the lender. If your portfolio is heavy on large-cap equity, you might also secure a better rate than if you hold mid or small-cap funds.
2. Loan-to-Value (LTV) Ratio
If you seek the maximum possible loan against your units (usually 50% for equity and up to 80% for debt), the lender might charge a slightly higher premium. Higher LTVs represent a greater risk of a margin call if the market dips, which is why a lower LTV often unlocks the best lamf interest rates.
3. Borrower Profile and Credit Score
Even though this is a secured loan, a strong CIBIL score can help you negotiate a lower "spread" over the base rate. Lenders view a high credit score as a sign of financial discipline, which can lead to a reduction in interest rates or a waiver of processing fees.
4. Digital vs. Traditional Processing
When you apply for LAMF online, you often find lower rates. Digital platforms have lower operational overheads than traditional bank branches. These savings are frequently passed on to the borrower in the form of competitive interest rates and faster disbursals.
How Interest Is Calculated and Charged
A loan against mutual funds (LAMF) is fundamentally different from a traditional personal loan. Instead of receiving a fixed lump sum with a rigid EMI, most LAMF products function as an overdraft facility. This structure ensures that interest is charged only on the amount actually used and only for the number of days it remains outstanding, making it one of the most cost-efficient borrowing options for short-term liquidity needs.
When a lender sanctions a limit, say ₹10 lakh, that entire amount is not considered “borrowed.” It simply becomes the maximum available credit you can draw from. If you withdraw only a portion of it, interest is calculated exclusively on that withdrawn amount, not on the unused balance.
In an overdraft-based loan against mutual funds, interest is calculated daily on the closing outstanding balance. This means the moment you repay any portion of the loan, your interest cost reduces immediately. There is no fixed EMI pressure and no obligation to keep the loan running for a minimum tenure.
This flexibility is particularly valuable for business owners, freelancers, and investors who need short-term working capital without committing to long repayment schedules.
Unlike personal loans or business term loans, lending against mutual funds typically carries no foreclosure or prepayment charges. You can repay the entire outstanding amount whenever cash flows normalize, without paying any penalty. In contrast, personal loans often charge 2% to 5% of the outstanding principal for early closure, significantly increasing the effective cost of borrowing.
Detailed Example: How Interest Works in Practice
Assume the following scenario:
Mutual fund portfolio value: ₹20 lakh
Eligible Loan-to-Value (LTV): 50%
Sanctioned loan limit: ₹10 lakh
Interest rate: 10% per annum
Loan structure: Overdraft
Now consider actual usage:
You withdraw ₹2 lakh to manage a short-term business cash flow gap and repay it after 15 days.
Interest calculation:
Annual interest on ₹2 lakh at 10% = ₹20,000
Daily interest = ₹20,000 ÷ 365 ≈ ₹54.79
Interest for 15 days = ₹54.79 × 15 ≈ ₹822
So, instead of paying interest on ₹10 lakh or committing to EMIs, you pay just ₹822 for using ₹2 lakh for 15 days.
If you repay the amount on the 16th day, interest stops immediately.
Why Choose This Over Other Loans?
When evaluating a loan against mutual funds, it helps to see how it stacks up against other popular secured borrowing options. While gold loans are fast, they often carry higher interest rates or require physical storage. A loan against mutual funds is entirely paperless and stays in your demat account.
LAMF vs. Personal Loans
Personal loans are unsecured, which leads to interest rates between 13% and 24%. They also require rigid EMIs that include both principal and interest. In contrast, a loan against mutual funds offers rates near 10% and allows you to pay only the interest monthly.
LAMF vs. Selling Investments
Selling your funds means losing out on future growth and paying capital gains tax. By opting for lending against securities, you avoid the tax hit and keep your "time in the market" intact, which is the most critical factor for long-term wealth creation.
LAMF vs. Loan Against Property
While a loan against property (LAP) might offer slightly lower rates, the processing time is often several weeks. You can apply for LAMF online and get funds in your account within a few hours, making it the superior choice for urgent liquidity.
Strategic Advantages for Business Owners
For entrepreneurs, lending against securities acts as a safety net. Instead of letting capital sit idle or liquidating it for a short-term project, you can use the loan against mutual funds facility to bridge the gap. This ensures that your personal wealth continues to grow while your business remains liquid.
Businesses often experience uneven cash cycles where expenses like payroll, vendor payments, or inventory purchases arise before customer payments are received. A loan against mutual funds allows you to bridge these short-term gaps without resorting to high-interest business loans, and the amount can be repaid as soon as receivables are realized.
Redeeming mutual fund investments to fund operational or expansion needs can trigger capital gains tax and permanently interrupt long-term compounding. Lending against securities helps avoid these taxable events, ensuring your investments remain intact and continue to grow while you access liquidity.
Because a loan against mutual funds is typically structured as an overdraft backed by personal investments, it may not reflect as aggressively on the business balance sheet as a conventional term loan, helping preserve healthier leverage and solvency ratios.
The overdraft structure ensures interest is charged only on the amount used and only for the duration it is outstanding, making it a far more cost-efficient solution for temporary funding needs compared to fixed-EMI loans.
By preserving both liquidity and investment continuity, a loan against mutual funds allows business owners to manage short-term financial stress without compromising long-term wealth creation or operational flexibility.
Conclusion
A loan against mutual funds is perhaps the most underutilized financial tool in an investor's arsenal. It provides a perfect balance between liquidity and long-term wealth preservation.
By choosing to apply for LAMF online, you gain access to a flexible credit line with LAMF interest rates that are far more sustainable than traditional credit options. Whether you are looking to expand your business or handle an emergency, lending against securities ensures your money works for you in two places at once.
If you are looking for a seamless, transparent, and highly efficient way to unlock the value of your portfolio, you should explore what discvr.ai has to offer. Our LAMF product is designed to provide quick access to capital with competitive rates and a completely digital experience.