Loan Against FD and Mutual Funds: Rates, LTV, Risks

A loan against a fixed deposit or mutual fund units lets you raise cash without breaking the deposit or selling your investments. Banks usually lend 75% to 90% of an FD's value at about 1% to 2% above the FD rate, while loans against mutual funds typically give around half the value of equity funds and more for debt funds. These are among the cheapest and quickest loans available, with little or no paperwork, but each comes with its own catch.

Loan against FD: how it works

You pledge your fixed deposit to the bank that holds it, and the bank gives you a loan or, more commonly, an overdraft (OD) limit. The FD keeps earning interest while it is pledged. You cannot withdraw the FD until the loan is cleared, and the bank can adjust the deposit against unpaid dues.

Most banks allow this against FDs in your own name, including online FDs, often through net banking in minutes. Tax-saver FDs with a five-year lock-in cannot be pledged. Lenders generally do not give loans against FDs held in another bank.

Worked example: break the FD or borrow?

Neha has a ₹5 lakh FD at 7% a year with two years left. She needs ₹2 lakh for six months to cover a gap before a bonus arrives.

Option 1: Take an OD against the FD at 8% (1% above the FD rate)

• Interest on ₹2 lakh for six months: ₹2,00,000 × 8% × 6/12 = ₹8,000
• The full ₹5 lakh FD keeps earning 7%. The ₹2 lakh portion earns ₹2,00,000 × 7% × 6/12 = ₹7,000 over the same period
• Net cost of borrowing: ₹8,000 − ₹7,000 = about ₹1,000

Option 2: Break the FD early

Banks pay premature withdrawal interest at the rate applicable for the period the deposit actually ran, minus a penalty that is commonly 0.5% to 1%. If the one-year rate was 6.5% and the penalty is 1%, Neha earns 5.5% instead of 7% for the year already completed:

• Interest lost on ₹5 lakh: ₹5,00,000 × (7% − 5.5%) × 1 year = ₹7,500
• She also loses the 7% rate on the money she does not need, and may have to reinvest at a lower rate

Here the OD is far cheaper. The answer changes for long-term needs: if you plan to keep the loan for years, the 1% to 2% spread adds up, and breaking the FD may cost less. Check what your deposit would have earned with our FD calculator.

Loan against mutual funds: how it works

You pledge mutual fund units to a bank or NBFC. The lender marks a lien on the units through the fund's registrar (CAMS or KFintech), so you cannot redeem or switch them until the loan is repaid. The units stay invested in your name and continue to earn returns, including any dividend or IDCW payouts.

Many lenders now offer a fully digital process: you fetch your holdings with your PAN and an OTP, select the units, accept the lien, and get an OD limit within hours.

How much you can borrow

RBI's directions for banks, revised in 2025 and 2026, set the maximum LTV for each type of security, with mutual fund units allowed higher LTVs than listed shares. Lenders are free to apply lower limits, and most do. RBI also raised the ceiling on bank loans to individuals against listed shares from ₹20 lakh to ₹1 crore from October 2025. NBFC limits follow their own regulatory framework and policy.

Not every scheme is accepted. Lenders keep an approved list that usually excludes small, illiquid or very high-risk schemes, and units in ELSS during their three-year lock-in cannot be pledged.

Rates and costs

Loans against mutual funds or securities commonly cost around 9% to 12% a year at banks and large NBFCs, depending on the lender and amount. Expect a processing fee, lien-marking charges and possibly an annual renewal fee for the OD limit. Compare the Annual Percentage Rate in the Key Facts Statement.

Borrow or sell?

Selling mutual fund units can trigger capital gains tax. Under current rules, equity fund gains held for more than 12 months are taxed at 12.5% above ₹1.25 lakh a year, and short-term equity gains at 20%. For details, see our guide on capital gains tax on mutual funds. Selling also takes you out of the market, and some funds charge an exit load if you redeem early.

Borrowing avoids these, but the loan interest is usually a certain cost while fund returns are uncertain. Pledging generally makes sense for short gaps of a few months, not for long-term borrowing.

Margin calls: the key risk

With FDs, the value of the security does not fall, so there are no margin calls. Mutual fund units are different.

If markets fall and your loan exceeds the permitted percentage of the reduced value, the lender sends a margin call. You then have a short window to:

1. Repay part of the loan, or
2. Pledge additional units

If you do neither, the lender can redeem your pledged units at the prevailing NAV, possibly at a loss and with tax consequences. To reduce this risk, borrow well below your maximum limit and keep some spare cash or unpledged units available.

Comparing the options

For more on unsecured borrowing, see our personal loan interest rates guide. If you hold gold rather than investments, compare a gold loan.

Practical tips

1. Use an overdraft, not a term loan, when you are unsure how much you need; you pay interest only on what you draw.
2. Repay before the FD matures. Otherwise the bank will adjust the maturity proceeds against the loan.
3. Do not borrow against investments meant for a goal that is near, such as a child's admission fee due in months.
4. Keep a buffer below the MF limit to avoid margin calls.
5. Check that the lender is regulated (a bank or RBI-registered NBFC) before granting a lien on your units.

Key takeaways

• Loans against FDs typically give 75% to 90% of the deposit at 1% to 2% above the FD rate, with no market risk.
• For short-term needs, borrowing against an FD is often cheaper than breaking it and paying the premature withdrawal penalty.
• Loans against mutual funds give roughly half the value of equity funds and more for debt funds, within RBI and lender limits.
• Pledged mutual funds face margin calls when markets fall; borrow well below the maximum.
• Both are best for short gaps, not for long-term borrowing.