By BillCut
Last updated: 1 November 2026
The main loan against mutual funds risks are simple. Your units can fall in value while the loan stays the same. That can push your loan above the limit the lender is allowed to give. You then have to fix the gap quickly, and your units stay locked while the loan is open. This post explains each risk using RBI and SEBI sources.
What does a loan against mutual funds mean?
You keep your mutual fund units as security and borrow against them. The units are not sold on day one. They are held back as a pledge until you repay. RBI’s 2026 directions for commercial banks say mutual fund units can count as eligible securities if they are listed, or can be redeemed through the fund house, and invest in equity, equity related or debt instruments. See the RBI credit facilities amendment directions.
Why can a fall in NAV hurt a loan against mutual funds?
NAV is the price of one unit. SEBI’s investor FAQ says the NAV of a fund changes every day as market prices of its holdings change, and that mutual fund investments are subject to market risks. See the SEBI FAQs for mutual fund investors. SEBI’s investor site also notes that market changes affect the value of a fund’s investments. See its page on net asset value. A loan does not shrink when NAV falls. So the loan becomes a larger share of what your units are worth.
What is the loan to value limit and why does it matter?
Loan to value, or LTV, is the loan outstanding divided by the value of the securities on any day. For individuals, RBI sets a ceiling for banks. The ceiling is lower for equity oriented units than for debt units.
| Security | LTV ceiling for banks (individuals) |
|---|---|
| Mutual fund units other than debt funds, and ETF units | 75 percent |
| Debt mutual fund units | 85 percent |
The same RBI page says units are valued at the lower of the average daily NAV of the last six months or the previous trading day’s NAV. That means a recent rise in NAV may not fully count, while a fall counts at once. Banks also write their own margin and valuation rules, including margin calls, in their policy. The page I read covers commercial banks. Other lenders follow their own RBI rules, so ask which ones apply.
What happens if the LTV limit is breached?
RBI says a breach must be fixed promptly, and in no case later than seven working days from the day it happens. How you fix it depends on your lender and loan agreement. Common routes are part repayment or adding more eligible security. Read the clause before you sign, because it also says what the lender can do if you do not act.
Illustrative example, not a BillCut offer. Suppose equity fund units are valued at 10,00,000 rupees and you borrow 6,00,000. LTV is 60 percent. If the value falls to 7,50,000, LTV becomes 80 percent. That is above a 75 percent ceiling, so you would need to bring it back within limits. The gap here is 6,00,000 divided by 0.75, which is 8,00,000 of required value, against 7,50,000 held.
What other mistakes should you avoid?
- Borrowing at the ceiling. A ceiling is not a target. A smaller loan leaves room for a market fall.
- Ignoring the lien. Units under lien are held back for the lender. Ask in writing how and when the lien is removed after repayment.
- Using it for spending you cannot repay. The loan is backed by investments, so a missed repayment puts those investments at stake.
- Forgetting redemption timing. SEBI’s FAQ says redemption proceeds are generally paid within three working days. Plan for that gap if you must raise cash fast.
- Not reading charges. Ask for all fees in writing before you accept.
For comparison with other borrowing, see secured vs unsecured loans in India.
Is a loan against mutual funds right for paying off other debt?
It can replace costlier dues for some people, but you swap an unsecured debt for one backed by your investments. If markets fall, the risk lands on your portfolio. Compare the full cost and the downside first. If you hold several high interest dues, such as card balances or personal loan EMIs, you can Check your options with BillCut and compare structured EMI routes that do not need you to pledge investments.
Two related reads: why panic selling hurts investors and personal loan traps to avoid.
How BillCut can help
BillCut is a balance transfer and debt reduction platform. It works with lending partners to help eligible borrowers move high interest dues, such as credit card balances and personal loan EMIs, into one structured EMI. BillCut earns from helping borrowers refinance, so it has an interest in this option. Approval and terms depend on the partner lender. BillCut does not offer loans against mutual funds.
Frequently asked questions
Can I lose my mutual fund units in a loan against mutual funds?
Your units stay yours, but they are held as security. If you do not repay or fix a shortfall, your loan agreement sets out what the lender can do. Read that clause closely.
What is a margin call on a mutual fund loan?
It is a request to restore the cover when the value of your units falls. RBI says banks must set margin and valuation rules in their policy, and breaches must be fixed within seven working days.
Does the loan amount fall when NAV falls?
No. The loan stays fixed while the value of units moves. That is why LTV rises when NAV drops.
Are debt funds safer than equity funds as security?
RBI allows a higher LTV ceiling for debt fund units, at 85 percent against 75 percent. That is a rule on lending limits, not a statement on safety. SEBI says all mutual fund investments carry market risk.
Can I still earn returns on units under lien?
Returns depend on how the fund performs, and they are not assured. Ask your lender how dividends, switches and redemptions are handled while the lien is on.
Is there a cap on how much I can borrow against securities?
RBI’s 2026 directions set a limit of 1 crore rupees per individual across the banking system for most eligible securities. Debt fund units follow bank set limits.
Who can I complain to if my lender does not respond?
Complain to the lender first. If you get no reply in 30 days, or are not happy with the reply, you can approach the RBI ombudsman.
Disclaimer: This post is general information. It is not investment, tax or legal advice and does not suggest that you borrow, buy, sell or hold any fund. Mutual fund investments are subject to market risks. Read scheme documents and your loan agreement carefully, and speak to a qualified adviser before you decide. Rules cited apply as published by RBI and SEBI on the pages linked, and may change.
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