What Is a Loan Against Equity Mutual Funds?
Most investors build their equity mutual fund portfolios with a long horizon in mind — retirement, a child’s education, or simply long-term wealth creation. Then an unplanned need for cash comes along, and the first instinct is often to redeem those units.
That instinct comes at a cost. Redeeming breaks the compounding cycle and can trigger tax on the gains you’ve built up over the years.
A loan against equity mutual funds works differently. Rather than selling your units, you pledge them with a bank or NBFC and borrow against their current value. The units continue to sit in your name and stay invested in the market. The only restriction is that they carry a lien, which means you can’t redeem or switch them freely until the loan is closed.
This is a different route from borrowing against equity in the form of individual shares, though the underlying idea is the same — your existing holding becomes the collateral, not the source of funds.
Lenders such as Bulwark Capital have made this reasonably efficient, largely because the collateral — your mutual fund units — already sits in a demat or folio account and is quick to verify.
How Loan Against Equity Mutual Funds Works
There are three moving parts to understand here, and each one affects how the loan behaves once it’s live.
The Pledging and Lien-Marking Process
When you apply for a loan against mutual funds, the lender places a lien on the units you’ve chosen to pledge. This happens through the Registrar and Transfer Agent — CAMS or KFintech, in most cases. The lien simply tells the RTA that these units cannot be redeemed without the lender’s sign-off. You still own them. You just can’t act on them independently while the loan is running.
NAV-Based Daily Revaluation
Here’s something borrowers frequently overlook: the loan limit isn’t set once and forgotten. It moves every single day, tied directly to the NAV of your pledged funds.
Markets go up, your collateral value goes up, and your available limit expands with it. Markets fall, and the reverse happens — your limit contracts, sometimes quickly.
Overdraft vs Term Loan Structure
Most lenders offer this as an overdraft (OD) facility rather than a fixed-tenure loan. In practice, that means:
- A maximum limit gets sanctioned upfront
- Interest is charged only on what you actually draw, not the full limit
- You can repay and redraw within that limit, much like a running credit line
A few lenders also offer a straightforward term loan with a set EMI schedule. Which structure works better depends on whether your requirement is a one-off or something that recurs.
LTV Ratio for Equity Mutual Funds Explained
The Loan-to-Value (LTV) ratio is what actually decides how much you can borrow, and it’s worth understanding in some detail.
In February 2026, the RBI revised its LTV framework for lending against securities. The cap for equity mutual funds moved up to 75% of the portfolio’s current value — a sizable jump from the earlier 50% limit.
That said, what RBI permits and what lenders actually sanction aren’t always the same number:
- RBI’s revised ceiling: up to 75% for equity mutual funds
- What most lenders actually apply: closer to 45–60%, since equity NAVs can move sharply in a short span
- Debt mutual funds, by comparison, get a higher LTV — up to 85–90% — because they’re considered less volatile
A simple example: say your equity mutual fund holdings are worth ₹10 lakh. If your lender applies a 50% LTV, your eligible loan against equity works out to roughly ₹5 lakh — even though the regulatory ceiling technically allows for more. It’s always worth confirming the exact LTV your lender is offering rather than assuming the maximum.
Interest Rates and Cost of Borrowing
A loan on equity mutual funds generally comes at an interest rate between 9% and 13% per annum, though the exact number depends on the lender, the fund category pledged, and the tenure chosen.
A few costs to factor in beyond the headline rate:
- Processing fee — a small one-time charge, usually a percentage of the sanctioned amount
- Non-utilisation charges — some lenders apply this on overdraft facilities if a minimum portion of the limit goes unused
- Interest calculation — computed daily on whatever amount is outstanding, not on the entire sanctioned limit
For context, unsecured personal loans in India typically run between 12% and 24% per annum. That gap is fairly significant, and it’s the main reason borrowing against equity has become a go-to short-term liquidity option for investors who’d rather not disturb their portfolio.
Eligibility Criteria and Documents Required
More people qualify for a loan against equity mutual funds than most assume, though the exact requirements do shift a bit from one lender to the next.
Who typically qualifies:
Salaried individuals who can show verifiable income, self-employed professionals and business owners, and high-net-worth individuals sitting on sizable equity fund holdings all tend to fit the bill. NRIs may also qualify in select cases, depending on the lender’s policy, and corporates or trusts holding investment-grade portfolios are usually eligible too.
Conditions that generally apply to the fund itself:
- Units must be held with an AMC or RTA that’s empanelled with the lender
- Only open-ended equity schemes are typically accepted — closed-end or illiquid funds don’t qualify
- The units shouldn’t already be pledged with another lender
Documents you’ll generally need:
- KYC — PAN, Aadhaar, address proof
- Mutual fund folio or demat statement
- Income proof, where the lender asks for it
RBI’s ₹1 Crore Aggregate Borrowing Cap
There’s a newer regulatory change here that deserves attention, particularly for investors with sizable portfolios spread across lenders.
The RBI has set a cap of ₹1 crore per individual on loans against securities — and this is added up across every bank and NBFC in the country, not per lender. So if you’re borrowing ₹40 lakh from one bank, your remaining headroom elsewhere drops accordingly, regardless of how large your total portfolio is.
This rule was originally set to apply from April 1, 2026. Banks pushed back a bit, saying they needed more runway to set up the tracking systems this would require, and RBI agreed — the effective date now stands at July 1, 2026.
What this means in practice:
- Existing borrowing against mutual funds with one lender reduces what you can access elsewhere
- Lenders are expected to start checking your aggregate securities-backed exposure before sanctioning a new loan against mutual funds
- Anyone planning to borrow close to or beyond ₹1 crore across multiple lenders should factor this cap into their planning well before July 2026
Benefits of a Loan Against Equity Mutual Funds Over Redemption
Put redemption and pledging next to each other, and the difference becomes fairly obvious pretty quickly.
Tax impact: If you redeem equity mutual funds you’ve held for over a year, you’re looking at LTCG tax of 12.5% on any gains beyond ₹1.25 lakh. None of that applies here. Since you’re pledging the units rather than selling them, there’s simply no tax event to worry about.
Compounding stays intact: The moment you redeem, your money exits the market completely. With a loan, your pledged units stay right where they are, still growing, while you use the borrowed amount for whatever came up.
Faster turnaround: Lenders can verify and lien-mark mutual fund units fairly quickly, which usually means disbursal happens faster than it would with a regular unsecured personal loan.
Repayment flexibility: A number of lenders let you go the interest-only route, so the amount you pay each month stays lighter and easier to manage.
At the end of the day, this combination means you’re not choosing between getting cash now and losing out on future growth — you get both.
Risks and Points to Watch
This facility has real advantages, but it isn’t without its own set of risks, and borrowers should go in with eyes open.
Margin calls: When your equity fund’s NAV drops sharply, the value of your collateral drops right along with it. At that point, the lender will usually step in and ask for one of two things — either pledge a few more units, or repay part of the outstanding loan so the margin comes back to where it needs to be.
Forced liquidation: If that margin call goes unmet within the window given, things get more serious. The lender is then within its rights to sell off a portion of your pledged units on its own, just to recover the amount owed.
End-use restriction: One thing that trips up a lot of borrowers — RBI simply doesn’t allow the money from a loan against mutual funds to go back into the market. So you can’t use this loan to buy more equity or mutual funds. It’s built for genuine cash needs, not for building more market exposure.
Cost over time: If the loan runs longer than expected, or markets stay choppy for a while, the interest cost can start to offset the benefit of not having redeemed.
The simplest safeguard against most of this is straightforward — borrow comfortably below your maximum eligible limit rather than stretching up to it.
Steps to Apply for a Loan Against Equity Mutual Funds
Once you know what to expect, the actual process is fairly quick.
- Select eligible funds — decide which equity mutual fund units you want to pledge
- Apply with the lender — submit your KYC and fund details, either online or at a branch
- Lien marking — the lender places the lien through the RTA, CAMS or KFintech
- Verification — the lender confirms the lien and checks the fund value
- Disbursal — the approved amount lands in your bank account, or your OD limit goes live
Most lenders finish this within a couple of working days, provided your documents and fund details check out without issues.
Making Your Portfolio Work Through a Cash Crunch
Long-term investing works because you stay invested long enough for compounding to do its job. A sudden need for cash midway through that journey shouldn’t have to mean stepping out of it altogether.
A loan against equity mutual funds lets your units keep growing while you get access to the funds you actually need — without a tax hit, and without derailing the plan you’ve been building toward.
That’s precisely where Bulwark Capital comes in. Quick, transparent loans against your mutual fund holdings, structured so your long-term investments never have to take a back seat to a short-term requirement. Visit bulwarkcapital.in to see how your existing portfolio can work harder for you.
