As a Mutual Fund Distributor (MFD), your revenue is directly tied to your Assets Under Management (AUM). When clients redeem their investments, your AUM drops — and so does your trail commission.
One of the most common reasons clients redeem their mutual funds is an urgent need for cash. Medical emergencies, business requirements, education payments, or simply a large unexpected expense can lead to a call from your client saying, “I need to withdraw my investments.”
Loan against mutual funds gives you a way to help your client meet their cash need without reducing your AUM. It is a genuine value-add — not just for you, but for your client too.
The Problem: Redemptions Hurt Everyone
When a client redeems their mutual fund holdings:
- For the client: They lose their invested units permanently. They may trigger capital gains tax. They break their long-term compounding cycle. If markets recover, they miss the upside.
- For the MFD: AUM decreases. Trail commission drops. The client’s portfolio shrinks, and it takes time and effort to rebuild.
In many cases, the client does not even want to sell their investments. They just need temporary liquidity. A loan against mutual funds addresses exactly this need.
How Loan Against Mutual Funds Helps Your Practice
1. Protect Your AUM
When a client borrows against their mutual fund holdings instead of redeeming them, your AUM stays intact. The units remain in the portfolio — they are just marked with a lien. Once the loan is repaid, the lien is removed and everything goes back to normal.
This means your trail commission continues uninterrupted. Over a year, across multiple clients, this can make a meaningful difference to your income.
2. Deepen Client Relationships
By offering a solution that helps clients during their time of need — without asking them to give up their investments — you position yourself as a trusted advisor, not just a product seller.
Clients remember who helped them during a crisis. This goodwill translates into:
- Stronger client retention
- More referrals
- Willingness to invest more with you in the future
3. Differentiate Your Practice
Most MFDs help clients with buying and selling mutual funds. That is the baseline. But if you also help them with liquidity solutions, tax-efficient strategies, and financial planning during emergencies, you stand apart from the crowd.
Offering loan against mutual funds is a practical way to differentiate your services without needing any additional certification or licensing.
4. Attract High-Value Clients
Investors with larger portfolios are more likely to need liquidity solutions at some point. By having loan against mutual funds in your toolkit, you become relevant to HNI and affluent clients who value comprehensive financial services.
These clients do not want to redeem their investments for short-term needs. They want an advisor who can show them smarter alternatives.
How It Works in Practice
Here is a typical scenario:
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Client calls you: “I need ₹10 lakh urgently for my daughter’s college admission. I am thinking of redeeming my ELSS fund.”
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You suggest an alternative: “Instead of redeeming, you can take a loan against your mutual fund holdings. Your investments stay intact, and you get the money you need.”
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Client applies: Through a lending platform, the client’s mutual fund units are pledged and a loan is disbursed — often within the same day.
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Client repays over time: The client repays the loan over a few months from their regular income.
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Result: The client’s mutual fund portfolio is untouched. Your AUM is intact. Trail commission continues. The client is grateful for the advice.
What You Need to Know to Advise Clients
To confidently suggest loan against mutual funds, here are the key points to understand:
Eligible Funds
Not all mutual fund schemes are eligible for pledging. Typically, most open-ended equity, debt, and hybrid funds from major AMCs are eligible. ELSS funds can also be pledged after the 3-year lock-in period. Check with the lending platform for the specific list.
LTV Ratios
- Equity funds: 50% to 65% of the current value
- Debt funds: 70% to 80% of the current value
- Liquid funds: Up to 80%
Interest Rates
Typically range from 9% to 12% per annum — significantly lower than personal loans (14-24%) or credit cards (24-42%).
Impact on Investments
The pledged units remain invested. They continue to earn returns and the NAV keeps moving as usual. The only restriction is that the client cannot redeem or switch those specific units until the lien is released.
Margin Calls
If the market value of the pledged units drops below a certain level, the lender may ask the client to pledge more units or repay part of the loan. Make sure your clients understand this, especially if they are pledging equity funds during volatile markets.
Addressing Common Client Objections
“Is it safe? Will I lose my investments?”
As long as the loan is repaid on time, the investments are completely safe. The lien is just a temporary mark that prevents selling — it does not transfer ownership. Once the loan is repaid, the lien is removed.
“Will I still earn returns on my pledged funds?”
Yes. The units remain invested in the same scheme. The NAV continues to move based on market performance. Any dividends or growth accrues to the client as usual.
“Is the interest rate worth it?”
Compare the interest cost with the alternative — redeeming during a market downturn, paying capital gains tax, and losing future compounding. In most cases, the interest on a short-term loan is far less than the cost of liquidating investments.
“What if I cannot repay?”
If the client defaults, the lender can liquidate the pledged units to recover the loan. This is a last resort, and clients should borrow only what they can comfortably repay.
Getting Started
If you want to start offering loan against mutual funds to your clients:
- Partner with a lending platform that offers loan against mutual funds
- Understand the product — eligibility, LTV, interest rates, processes
- Identify clients in your book who might benefit — especially those with large portfolios and potential liquidity needs
- Educate proactively — do not wait for a redemption call. Mention this option during your regular reviews so clients know it exists before they need it
Key Takeaways
- Every redemption reduces your AUM and trail income
- Loan against mutual funds lets your clients get liquidity without redeeming
- Your AUM stays intact, and your client’s long-term wealth-building plan continues
- This service deepens relationships, differentiates your practice, and attracts high-value clients
- Understanding the product well enough to address client objections is essential
- Proactive education is key — tell your clients about this option before they face an emergency
The best time to introduce loan against mutual funds to your clients is before they need it. Make it a part of your regular advisory conversations, and you will find it protects both your clients’ wealth and your business.
