Personal Finance & Investment Insights from our desk
Many investors today have a large portion of their savings in mutual funds.
And when an urgent need arises, the common question is:
"Should I redeem my mutual funds or is there a better option?"
Often, the smarter option is a Loan Against Mutual Funds (LAMF).
Why LAMF?
- Your investments keep compounding: You don't interrupt long-term wealth creation.
- No tax outgo today: Redemption often triggers capital gains tax. LAMF avoids that.
- Cheaper than personal loans: LAMF rates usually 8–10%, much lower than personal loans (12–18%) or credit cards (30%+).
- Flexible: Functions like an overdraft – withdraw, repay, re-withdraw. Pay interest only on what you actually use.
Example – The Power of Staying Invested
Suppose you need ₹1 crore for 3 years:
- MF portfolio return (assumed): 12% annually
- LAMF interest rate: 9% annually(If you redeem: you lose ~₹42.5 lakh of potential growth in 3 years).
If you take LAMF:
- Portfolio still grows ~₹42.5 lakh.
- Loan cost ~₹27 lakh
- Net advantage: ~₹15.5 lakh (plus tax deferral).
That's the power of keeping your money invested while still accessing liquidity.
Is the process easy?
Yes. Today, most banks and NBFCs offer instant digital LAMF. Units are pledged online (via CAMS/KFin), and money is available within hours. No heavy paperwork, no waiting.
Key Terms
- Loan-to-Value (LTV): ~50% for equity funds, 70–80% for debt funds
- Overdraft style: Interest only on what you use
- Lien marking: Units are pledged, not sold. Once repaid, lien is removed
- EMI's: Most lenders structure LAMF as a regular EMI facility, where both principal and interest are repaid monthly. A few, however, offer more flexible options - such as paying only the interest each month and settling the principal at the end of the tenure. These are rare though.
Risks and Practical Tips
- Market falls can trigger margin calls (lender may ask for top-up or sell units).
- Pledged units cannot be redeemed/switched during the loan.
- Not all MF schemes are eligible.
- Compare lenders for interest, LTV, and fees.
- Use for short-to-medium-term needs, not ongoing expenses.
- Always plan repayment to avoid forced liquidation.
The Big Picture
Redeeming is like chopping a tree for fruits
LAMF is like plucking fruits while the tree keeps growing.
For investors who believe in compounding, LAMF is often the smarter choice than redemption - provided repayment discipline is in place.