Every investor faces a moment when cash runs short but the portfolio is doing well. Selling mutual fund units to cover a short-term need feels like a step backward — especially when markets are in your favour. This is where an overdraft against mutual funds makes more sense. You stay invested, keep earning, and still get the cash you need. Among Indian investors, this facility has been gaining serious traction, and for good reason.
What is an Overdraft Facility?
An overdraft is a credit buffer built into your bank account. When your balance dips, you can still transact — the bank covers you up to a limit it has already approved. You pay interest only on what you pull out, and once money comes back in, the balance settles by itself. No fixed EMI, no lump sum repayment deadline.
Types of Overdraft
Banks and NBFCs offer overdrafts in several forms depending on what you can offer as security and what your financial profile looks like:
- Secured overdraft — uses an asset such as FD, property, insurance policy, shares, or mutual funds — as backing. Rates are more reasonable, generally between 8.5% and 12% a year.
- Unsecured overdraft — no collateral required. Goes purely on your income and repayment history. Rates run higher at 11% to 17% p.a.
- Salary account overdraft — linked to your monthly income. Most banks set the limit at two to three months’ salary.
- Current account overdraft — for businesses. Limit is based on account turnover and financial statements; useful when working capital runs tight.
- Overdraft against fixed deposits — your FD is the security. Banks typically offer 85–90% of the deposit value as the limit.
- Overdraft against MF or shares — your investment portfolio acts as the security, and the limit is based on what those investments are currently worth.
What is an Overdraft Against Mutual Funds?
An OD against mutual funds is a credit facility where you pledge your existing mutual fund units as collateral to get a sanctioned borrowing limit. You do not sell a single unit. The units stay invested, the NAV continues to fluctuate, and returns keep accumulating — while you have a live credit line to draw from.
Pledging vs Redeeming — The Key Difference
When you redeem mutual fund units, you exit the investment — exit loads may apply, capital gains tax kicks in, and future compounding on those units stops permanently.
Pledging for an overdraft facility against mutual funds is different. A lien is marked on your units in favour of the lender, but ownership stays with you. Dividends still come to you. NAV gains are still yours. And no tax event is triggered just by pledging.
Your mutual fund overdraft limit is straightforward — take the current NAV of your pledged portfolio, apply the LTV ratio the lender offers, and that is your credit line. A ₹10 lakh equity fund portfolio at 50% LTV gives you ₹5 lakh to work with.
How Does OD Against MF Work?
Step 1 – Pledging Mutual Fund Units
You pick the units to pledge and raise a lien marking request through CAMS or KFintech — fully digital with most lenders. Units stay in your folio and keep earning, but cannot be redeemed until the lien comes off.
Step 2 – Bank/NBFC Evaluates the Portfolio
The lender looks at:
- Whether the AMC and scheme are on their approved list
- The fund category — equity, debt, or hybrid
- Current NAV and total portfolio value
- Whether the scheme fits within their credit policy
Step 3 – Overdraft Limit is Sanctioned
The lender applies the LTV ratio to your portfolio and confirms the credit limit. As per regulatory norms, NBFCs can lend up to half of your equity mutual fund portfolio’s current value . Debt funds can go up to 80% depending on fund quality. The RBI has also proposed revising the debt fund cap to 75%, which would give borrowers even more headroom going forward.
Step 4 – Withdraw Funds as Needed
Once live, pull out what you need — in full or in parts — as many times as required within the tenure. No fresh application every time.
Step 5 – Interest Charged Only on Utilized Amount
Draw ₹1.5 lakh from a ₹5 lakh limit and interest runs only on that ₹1.5 lakh. Repay it, and the interest clock stops on that portion immediately. This is what makes the OD against MF genuinely cheaper than a term loan when your cash needs keep shifting.
Features of Overdraft Against Mutual Funds
- Instant liquidity without selling investments — money hits your account while your units keep working in the market
- Continue earning returns on mutual funds — NAV growth, bonus units, and IDCW payouts keep flowing through the entire OD tenure
- Flexible withdrawal and repayment — use what you need, pay back when you can, and dip in again — all without submitting fresh documents each time.
- Interest only on used amount — interest runs only on what you draw, not on the full sanctioned limit sitting idle.
- Most major banks and NBFCs now handle this completely online. Banks and NBFCs like Bulwark Capital have live digital flows — lien marking, OD account setup, and withdrawals all happen through their apps and net banking portals without a branch visit.
- The facility works well for short-term financial needs — a medical expense, an urgent business need, school fees — anything where you want cash fast without selling off your portfolio.
Eligibility Criteria for OD Against Mutual Funds
Most lenders follow a broadly similar set of conditions:
- Individual resident Indians between 18 and 75–80 years of age can apply. NRI eligibility is not uniform — it depends on the specific lender’s policy
- Equity, debt, and hybrid funds from SEBI-registered AMCs are generally accepted. Sectoral, thematic, international, and FOF schemes tend to get excluded
- KYC must be fully active — both with your fund house and the lender. Your PAN and Aadhaar details need to match exactly across both accounts, or the lien marking process will not go through
- Most lenders want at least ₹50,000 to ₹1 lakh in pledged fund value to open the facility. Some NBFCs will work with as little as ₹25,000
- Every lender maintains an approved AMC list. Always verify your specific scheme before you initiate anything
Documents Required
- PAN Card
- Aadhaar Card
- KYC documents — only needed if not already on record with the lender
- Mutual fund holding statement from CAMS, KFintech, or your demat account
- Bank account details for linking to the OD account
Types of Mutual Funds Accepted for Overdraft
Equity Mutual Funds
Large-cap, mid-cap, flexi-cap, multi-cap, and ELSS funds (post lock-in) are the most commonly accepted. Because equity NAVs can fluctuate easily, the RBI keeps the LTV ceiling at 50% for NBFCs. Some banks go up to 60% for more stable large-cap or index funds. ELSS units still within their 3-year mandatory lock-in cannot be pledged at all.
Debt Mutual Funds
Liquid, overnight, short-duration, corporate bond, and banking & PSU debt funds carry far less NAV volatility than equity. That stability is exactly why lenders are comfortable going higher on LTV — typically 70% to 80% of portfolio value. The RBI has signaled a possible revision upward to 75%, which would make debt fund collateral even more practical for borrowers.
Hybrid Funds
LTV on hybrid funds tracks the equity-to-debt split inside the scheme. An aggressive hybrid with 70% equity exposure will attract equity-level LTV. A conservative hybrid tilted heavily toward debt may qualify for something higher.
Loan-to-value (LTV) ratios differ across fund categories — and within the same category, the specific scheme matters. Two debt funds sitting in the same sub-category can carry very different risk profiles, and lenders price that.
Interest Rates and Other Charges
Here is what the cost structure looks like across most lenders:
The OD against mutual funds typically carries interest between 9% and 13% per annum. Setup usually involves a processing charge of 0.5% to 1% of the sanctioned limit, though existing customers often get this waived. Most lenders also charge an annual renewal fee to keep the overdraft limit active.
The sharper charge to watch is penal interest. If your outstanding amount crosses the eligible limit — say because the NAV falls — and you do not clear the difference or pledge more units in time, the lender applies a penal rate of 2% to 3% above the normal rate.
What determines your actual rate? Your credit profile, the category of funds pledged, how much of the LTV you are availing, and your existing relationship with the lender all play a role.
Benefits of Overdraft Against Mutual Funds
- No premature redemption means no exit load surprises, no SIP getting derailed, and no breaking a fund position right when it might be about to deliver
- From a tax standpoint, selling units triggers capital gains tax — short-term gains on equity at 20%, long-term at 12.5%. Borrowing through a mutual fund overdraft creates no tax event at all
- Once your OD account is active, getting money takes minutes — no fresh application, no additional approval cycle, no waiting
- Since your units back the loan, lenders do not need to dig deep into your income documents or run a heavy credit check. Approvals tend to be quicker and simpler than most unsecured borrowing
- Your portfolio stays fully invested the whole time. Whatever the NAV does during your borrowing period — that gain is entirely yours
Risks and Limitations
- Market volatility — a sharp NAV drop reduces collateral value and can shrink your available credit without warning
- Margin calls — if your portfolio falls below the LTV threshold, the lender will ask you to top up collateral or repay part of the outstanding amount.
- Limited credit access — LTV caps mean you can never access your portfolio’s full value; equity funds give you at most 50–60%
- Liquidation risk — unpaid margin calls give the lender the right to sell your pledged units to recover what is owed
- Not for long-term borrowing — at 9–13% p.a., interest accumulating over time quietly chips away at the returns your portfolio is building
Difference Between Loan and Overdraft Against Mutual Funds
| Basis | OD Against MF | Term Loan Against MF |
| Disbursement | Flexible withdrawals as needed | Full amount given at once |
| Interest | Only on amount used | On entire loan from day one |
| Repayment | No fixed schedule; withdraw and repay freely | Fixed monthly EMIs |
| Best For | Short-term or variable cash needs | Planned, large one-time expenses |
| Cost Efficiency | Better for variable usage | Better for fixed borrowing |
| Flexibility | High | Moderate |
If you know exactly how much you need and for how long, a term loan may work out cheaper. If your cash need is unpredictable, the overdraft against MF saves significantly because you only pay for what you actually draw.
Who Should Consider an Overdraft Against Mutual Funds?
- Salaried individuals managing a one-time large expense without wanting to break SIPs or book capital gains
- Business owners who need working capital for 30 to 90 days and cannot wait for a term loan to process
- Anyone facing a sudden financial need where speed matters more than anything else
- Investors sitting close to the end of a holding period or on significant unrealised gains — for them, redeeming now simply costs too much
Things to Check Before Applying
- Compare the actual cost across lenders — not just the headline rate but processing fees, annual renewal charges, and the penal clause
- Check the approved fund list carefully — your AMC might be on it but your specific scheme might not, especially for thematic or sectoral funds
- The LTV ratio determines how much money you actually get — two lenders with the same interest rate can offer very different LTV percentages
- Ask exactly how repayment works — some lenders say flexible but still require minimum monthly interest payments; also check prepayment charges
- Look at how digital the process actually is — when you need funds urgently, branch visits for lien marking defeat the purpose
Conclusion
An overdraft against mutual funds solves one of the most common investor problems — needing liquidity without wanting to break a good investment. Your units stay in, your returns keep building, and you only pay for what you borrow. For short-term needs, very few credit products match this on flexibility and cost.
Borrow within what you can comfortably repay, keep an eye on your NAV during rough market patches, and do not use this for anything that stretches beyond a short-term need.
For a fast, transparent overdraft facility against mutual funds, Bulwark Capital offers quick approvals and a fully online process — so your investments keep growing while your short-term needs get handled. Visit bulwarkcapital.in to get started.
