Mutual funds are built for long-term wealth creation compounding, goal-based investing, and financial security. Yet when a sudden financial need arises, most investors follow the same instinctive approach:

“I’ll redeem my mutual funds to arrange cash quickly.”

But redemption comes at a hidden cost. It breaks compounding, shrinks your corpus, triggers potential taxes, and slows your long-term wealth journey.

A far smarter, lesser-known option is Loan Against Mutual Funds (LAMF)-a way to access liquidity without disrupting your investments. And when used correctly, LAMF can help investors meet immediate needs while preserving future gains.

1. What Is LAMF?

Loan Against Mutual Funds (LAMF) allows you to borrow money by pledging your mutual fund units instead of selling them. Your units remain invested and continue to grow while the lender places a lien on them.

Key features:

• Fully digital and paperless
• Quick disbursal
• Attractive interest rates vs. personal loans
• Pay interest only on the amount you actually use
• No capital gains tax since you’re not redeeming

In short, LAMF gives you short-term liquidity without interrupting the long-term compounding engine of your portfolio.

2. The Current LAMF Market in India

With Indian mutual fund AUM crossing ₹68 lakh crore, the demand for structured, efficient lending solutions linked to investments is rising. LAMF is growing steadily and is estimated to be a ₹45,000–55,000 crore market, though it still forms less than 1% of total MF assets.

Why so low?
Because most investors don’t know this option exists-and those who do often assume it is complicated. In reality, modern RTAs (CAMS, KFin) have made lien marking instant, digital, and seamless.

Wealth Advisory Platforms

Many wealth managers now integrate LAMF journeys directly into their client dashboards.

Despite high availability, actual adoption is still very low-presenting a meaningful opportunity for informed investors.

3. Regulatory Framework

LAMF operates within a robust regulatory environment:

• SEBI regulates mutual funds and ensures correct valuation.
• RBI oversees lending rules for banks and NBFCs.

Loan-to-Value (LTV) Ratios

• Equity funds: 40–50%
• Hybrid funds: 50–60%
• Debt funds: 70–80%
• Liquid/overnight funds: 80–90%

Disclosure: The LTV ratios are provided by the lender. The above mentioned ratios are generic in nature

4. The Real Advantage: Protecting Your Compounding (Opportunity Cost)

Here is the most important point:
Redeeming your mutual funds can cost you far more than the amount you withdraw.

When you redeem:

• Your invested base reduces
• Your future returns shrink
• You lose compounding
• You may face capital gains taxes

This invisible loss is what we call opportunity cost-the money you could have earned if you stayed invested.

LAMF solves this beautifully.

By borrowing against your MFs, you keep your entire portfolio intact while paying a manageable interest rate. If your expected fund return is greater than the interest cost, you end up ahead.

And this is not theoretical.
It happened in a real case we handled.

5. A Real Client Example (From Our Advisory Practice)

A client recently approached us with an urgent requirement of ₹5,00,000. His immediate plan was to redeem this amount from his ₹20,00,000 mutual fund portfolio.

On the surface, it made perfect sense.
But what would it cost him?

If He Redeemed ₹5,00,000

• His invested amount would drop to ₹15,00,000.
• That amount would grow at ~12% over the next year.
• After 12 months, the portfolio would reach only around ₹16.9 lakh approximately

He would get liquidity, but lose a year’s worth of compounding on the full ₹20 lakh.

What We Suggested Instead: Take LAMF

We advised him to take a Loan Against Mutual Funds of ₹5,00,000 (In a way an Overdraft), at an interest rate of around 10.5% p.a., while keeping his full ₹20,00,000 invested.

Here’s what happened:

• His entire portfolio continued compounding at ~12%.
• After 12 months, his portfolio would have grown to about ₹22.54 lakh approximately
• He paid around ₹52,500 approximately as interest over the year.
• After deducting the interest, the portfolio still stood at around ₹21.98 lakh approximately

Final Outcome After 1 Year

Net Wealth Preserved: More than ₹5 lakh

This is the power of staying invested.
LAMF gave him liquidity and helped him protect (and grow) long-term wealth.

Conclusion

LAMF is more than just a loan product-it is a powerful wealth preservation strategy.
It allows investors to meet urgent cash needs without sacrificing long-term growth, tax efficiency, or compounding.

As our real client example shows, choosing LAMF over redemption can literally protect lakhs of rupees in future wealth-making it one of the smartest financial tools available to today’s mutual fund investors.

Disclosure: This information is intended solely for educational purposes and may not represent fully precise or guaranteed outcomes.