Introduction

A Loan Against Mutual Funds allows you to borrow against your investments without selling them. You pledge your mutual fund units as collateral and receive funds based on a permitted Loan-to-Value (LTV) ratio. If you're new to the structure, you can review how a Loan Against Mutual Funds workshere. But what happens when markets fall? What triggers a loan against mutual funds margin call? What exactly is a LAMF shortfall scenario? And most importantly what happens if I default on LAMF? Let’s break it down step-by-step.

Understanding LTV and How NAV Drops Trigger Risk

Every LAMF is governed by Loan-to-Value (LTV) rules. For equity mutual funds LTV is up to 50%. Debt mutual funds have an LTV of up to 80%. If your portfolio is ₹10 lakh and you borrow ₹5 lakh at 50% LTV, you are at the maximum permitted exposure. Now imagine the NAV falls by 20%. Your portfolio becomes ₹8 lakh. Your loan remains ₹5 lakh. New LTV = 62.5%. This is now an LTV breach in loan against mutual funds, which triggers a loan against mutual funds margin call. If you want deeper clarity on how LTV works in secured lending, refer to thisguide.

What Is a Margin Call?

A margin call is an official notice issued when your pledged mutual funds fall in value and your LTV exceeds the permitted maintenance margin requirement. This creates a LAMF shortfall scenario, meaning:

• Your collateral value is insufficient

• The loan exposure exceeds risk limits

• Corrective action is required

For a detailed explanation of how a margin call in LAMF works,see. A margin call is not a default. It is an early warning.

Timeline: What Happens When NAV Drops in LAMF?

Here’s how a typical NAV fall and LAMF risk escalation unfolds.

1. Day 0 – Maintenance Margin Breach. The system detects NAV drop and notices that LTV exceeds permitted threshold. A LAMF shortfall scenario is created.

2. Day 1–2 – Loan Against Mutual Funds Margin Call Issued. You receive formal communication specifying all the details such as current drawing power, current market value, short fall amount along with grace period.

3. Day 3–7 – Grace Period to Resolve the LAMF Shortfall Scenario. Most lenders allow a short resolution window which typically ranges from 5 to 7 business days. During this grace period you can either pledge additional units or repay the principal amount. This should bring the LTV back within acceptable threshold.

If the markets recover and the portfolio value increases to previously acceptable LTV limits then you do not have to take any action. The margin call trigger is reset. However, if the markets do not recover and you still have not taken corrective measures then the lender will, at their discretion, sell off your mutual funds to ensure that LTV is back within acceptable limits. They may impose additional charges as a part of this sell off.

What Happens If I Default on LAMF?

If you are unable to repay monthly EMI then your loan will be marked as a “Days Past Due” loan. The lender will immediately notify you to make good on the overdue payment. Lenders will typically give you 7 business days to repay the amount. You will also incur additional charges as follows.

1. Bounce charges. This is typically in the range of ₹800-₹1200.

2. Penal interest rate. The overdue amount will start accruing an interest which is significantly higher than your loan’s rate of interest. This is called “penal interest”.

3. In addition to all this your bank may also penalise you for the failed mandate.

It is in your best interest to repay the overdue amount within stipulated time. If you need additional time you should contact the lender. They may be willing to extend the grace period depending on your repayment history and related factors.

If you are unable to repay within the stipulated time then the lender will liquidate your securities to recover the overdue amount and charges. The lender could also report your EMI miss to the credit bureau. An EMI miss is a serious matter and will significantly affect your credit rating. A bad credit rating means future lenders will offer you loans at a significantly higher interest rate or might outright refuse to lend you.

How to Avoid a LAMF Default

Here are some good practices to follow while taking out loans against mutual funds.

1. Proactively monitor your “drawing power”. If you take LAMF through Quicklend you will be able to do so through the “My Loans” dashboard.

2. Keep sufficient funds in your bank account to ensure EMI payments are honored by your bank.

3. If for whatever reason you are unable to meet the EMI payment proactively contact the lender to let them know your situation. Some will give you an option to sell off the collateral without marking your loan as “Days Past Due”.

4. If your EMI is marked as a miss then you could get it corrected by contacting the lender after the amount has been recovered.