Many investors assume that the loan against mutual funds interest rate is always low.
But in reality, two borrowers can get very different rates for the same type of loan.
Without a proper understanding of how the interest rate fluctuates, you could end up paying 2–4% more interest than required.
Depending on the below-listed factors, the rate of interest on a loan against mutual funds fluctuates:
- RBI repo rate changes
- Type of mutual fund pledged
- Loan-to-value ratio (LTV)
- People either prefer a term loan or an overdraft facility
- Your relationship with the lender
In this guide, we will explain:
- Latest LAMF interest rate trends
- How lenders calculate the mutual fund loan interest rate
- Hidden charges most borrowers miss
- Equity vs debt mutual fund rate differences
- Smart ways to reduce your borrowing cost
Read this article to solve all your queries before applying for a loan.
What Is a Loan Against Mutual Funds (LAMF)?
A Loan Against Mutual Funds (LAMF) helps people to obtain funds by using their mutual fund units as security.
Instead of cashing in your investments, you can prefer using them for a limited period as collateral security for your lender.
The lender places a lien on your mutual fund units and renders you a credit limit based on their value.You continue to remain the owner of the investment, and the units stay in your demat or folio account.
How Does LAMF Work Without Selling Your Investments?
The process is simple.
- You select mutual fund units to pledge.
- A lien is marked on those units.
- The lender checks the current NAV value.
- A loan amount is approved based on the LTV ratio.
- You will get your funds directly to the bank account.
You can expect steady approvals here as compared to unsecured loans, as the loan is backed by your investments.
Who Should Consider This Type of Loan?
A loan against mutual funds may be suitable for:
- Investors who prefer short-term liquidity
- People who do not want to encash their investments
- Individuals seeking lower interest than personal loans
- Borrowers who want a quick digital loan option
However, understanding the LAMF interest rate structure is very important before applying.
Loan Against Mutual Funds Interest Rate – How It Actually Works
The interest rate on loan against mutual funds is generally lower than unsecured loans.
But the exact rate varies between lenders.
In India, most lenders offer LAMF interest rates between 8% and 12% annually.
Typical Interest Rate Range
| Lender Type | Approx Interest Rate |
| Bank | 8% – 10% |
| NBFCs | 9% – 12% |
| Digital Platforms | 9% – 11% |
The final rate depends on the risk profile and type of mutual fund pledged.
Digital Loan Against Mutual Funds Interest Rate vs Traditional Process
Digital lending platforms have made LAMF faster and more transparent.
Traditional banks may require manual paperwork.
Digital lenders typically offer:
- Faster approval
- Online lien marking
- Instant credit line activation
Because operational costs are lower, digital loan against mutual funds interest rate may sometimes be more competitive.
Types of LAMF Interest Rate
Fixed Interest Rate
The interest remains the same during the entire loan tenure.
Advantages:
- Predictable repayment
- Protection from market interest fluctuations
However, the margin of fixed rates may be slightly higher than floating rates.
Floating Interest Rate
Floating rates change according to benchmark rates such as the RBI repo rate.
Advantages:
- Lower initial rate
- Possibility of interest reduction
But the rate can increase depending on the market fluctuations.
Which Type of LAMF Interest Rate Should You Choose?
Your choice depends on your financial situation.
| Situation | Better Option |
| Short-term loan | Floating rate |
| Long-term planning | Fixed rate |
| Stable interest environment | Floating rate |
For most borrowers, floating rates are more common in LAMF.
How the Rate of Interest on Loan Against Mutual Funds Is Calculated?
The interest is usually calculated on the amount you actually use.
This is especially true if you take the loan as an overdraft.
Example
Suppose:
- Value of Mutual fund pledged: ₹10,00,000
- LTV ratio: 50%
- Amount of loan limit approved: ₹5,00,000
- Rate of interest: 9%
On withdrawal of ₹2,00,000, interest will be charged only on that amount.
Cost of annual interest:
₹2,00,000 × 9% = ₹18,000
This structure makes LAMF more flexible compared to many other loan types.
What Factors Affect the Mutual Fund Loan Interest Rate?
Several factors influence the mutual fund loan interest rate offered by lenders.
Type of Mutual Fund (Equity vs Debt)
The volatility of equity mutual funds is generally higher as compared to others.
When it comes to stability, people usually prefer debt mutual funds.
Typical LTV rules:
| Fund Type | Maximum LTV |
| Equity Funds | Up to 50% |
| Debt Funds | Up to 70% |
You may get a slightly lower rate of interest due to higher stability.
Loan-to-Value (LTV) Ratio
The LTV ratio will help you to know the amount of loan that will be sanctioned in comparison to your investment value.
Higher LTV increases lender risk.
This may slightly increase the LAMF loan interest rate.
Market Volatility and NAV Movements
Mutual fund values change with the market.
If NAV drops significantly, lenders may:
- Reduce loan limits
- Ask for additional collateral
- Trigger margin calls
Your Credit Profile & Lender Risk Assessment
Although LAMF is secured, lenders may still check:
- Credit score
- Banking relationship
- Repayment history
Better profiles may get preferential interest rates.
Overdraft vs Term Loan: Which Costs Less?
LAMF can be structured in two ways.
| Loan Type | Key Feature |
| Overdraft | Interest only on the amount used |
| Term Loan | Interest on full loan amount |
For short-term needs, overdraft is usually more cost-effective.
Smart Ways to Reduce Your Interest Cost
You can reduce borrowing costs by:
- Using the loan only when necessary
- Choosing overdraft structure
- Comparing lenders before applying
- Maintaining a good credit score
How Digital Loans Against Mutual Funds Are Changing Interest Rates?
Digital lending has simplified the LAMF process significantly.
Faster Processing Leads To Lower Operational Costs
- Online systems facilitates quick application process to lenders
- This reduces administrative expenses and speeds up approval.
Transparent LAMF Loan Interest Rate Structure
Digital platforms often provide:
- Real-time interest calculation
- Online dashboards
- Clear loan statements
This improves transparency for borrowers.
When Digital LAMF Makes More Financial Sense
Digital platforms may be beneficial when:
- You need funds quickly
- You prefer a completely online process
You want flexible credit access
Charges Apart from LAMF Interest Rate You Must Check
Interest rate is not the only cost.
You should also check additional charges.
Common Charges
- Processing fees
- Prepayment charges
- Penal interest
- Documentation fees
Hidden costs can increase the total borrowing expense.
Loan Against Mutual Funds Interest Rate vs Other Loan Options
| Loan Type | Interest Rate |
| Loan Against Mutual Funds | 8% – 12% |
| Personal Loan | 12% – 24% |
| Credit Card Loan | 24% – 36% |
LAMF is generally cheaper because the loan is secured.
NBFC vs Bank: Which One Should You Choose for LAMF?
| Factor | Bank | NBFC |
| Interest Rate | Lower | Slightly Higher |
| Approval Speed | Slower | Faster |
| Flexibility | Limited | More Flexible |
Many borrowers compare both before deciding.
How to Get the Best LAMF Interest Rate?
To get the best loan terms:
- Look for stable mutual fund investments
- Make sure you have a good credit profile
- Comparison of multiple lenders
- Take consultation from experienced financial advisors
Risks You Should Not Ignore Before Applying
Although LAMF is useful, it also carries risks.
Market Fall & Margin Shortfall Risk
If mutual fund value drops sharply, lenders may ask for additional collateral.
Forced Liquidation of Units
Failure to maintain margin may result in the lender selling pledged units.
Interest Accumulation Risk
Repay the loan on time to avoid any risk of higher interest.
Quick Checklist Before Applying
Before taking a loan against mutual funds:
- Check interest rate structure
- Compare lender charges
- Understand LTV rules
- Borrow only the required amount
Final Verdict: Should You Apply for a Loan Against Mutual Funds?
A loan against mutual funds can be one of the most efficient financial tools if you know how to exercise its benefits correctly.
When It Makes Financial Sense
- Short-term liquidity requirement
- Avoiding premature investment redemption
- Lower interest compared to personal loans
When You Should Avoid It
- If market volatility is high
- If you cannot manage margin requirements
- If repayment capacity is uncertain
A Smarter Way to Use Your Investments Without Breaking Them
Instead of selling investments during temporary financial needs, LAMF allows you to unlock liquidity while keeping your portfolio intact.
However, understanding the loan against mutual funds interest rate and loan structure is essential before applying.
Bulwark Capital, an RBI-Licensed NBFC in India, offering lowest interest rate at 9% in India. Visit bulwarkcapital.in for more information.
