Neither is automatically better. In India, a loan against a fixed deposit (FD) is usually the more predictable choice when you already have an eligible deposit and want collateral whose value does not move with the market. A loan against mutual funds (LAMF) can be more flexible for short, intermittent borrowing because an overdraft may charge interest only on the amount used, but a falling net asset value (NAV) can reduce your available limit and trigger a demand for more collateral or repayment.
The right choice depends on the lender’s current written rate and effective cost, the collateral accepted, how long and how often you will borrow, and whether you can respond quickly if a mutual-fund margin call occurs. The products and figures below are Indian lender examples; they are not universal rates or rules.
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What each facility does
Both products let you raise cash without immediately selling an investment. An FD loan places a lien on the time deposit, while an LAMF places a lien or pledge over eligible mutual-fund units. You remain the owner, but the asset is encumbered until the lender releases the lien or pledge after repayment.
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The lender advances money against a specific time deposit rather than requiring you to close it early. State Bank of India’s YONO description says its facility does not require premature closure, uses an overdraft structure, and calculates interest on a daily reducing balance. The underlying deposit still has a lien, so you cannot treat the pledged principal as freely withdrawable until the borrowing is cleared. See the State Bank of India YONO terms for the product-specific conditions.
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Loan against mutual funds
The lender accepts only schemes and units that meet its eligibility rules. Your units remain invested, but they are pledged, and their value is re-evaluated as NAV changes. The facility is often an overdraft: interest can be based on the amount actually drawn and the time it remains outstanding. That flexibility is useful only if the rate, fees and margin rules are competitive for your situation.
Side-by-side comparison
| Decision point | Loan against fixed deposit | Loan against mutual funds |
|---|---|---|
| Collateral | Lien on an eligible time deposit | Pledge or lien over lender-approved mutual-fund units |
| Value stability | Deposit principal does not fluctuate with market NAV | NAV can rise or fall, changing the available borrowing limit |
| Indicative borrowing amount | State Bank of India YONO states up to 90% of eligible FD value | State Bank of India and Federal Bank state up to 50% of equity, hybrid and exchange-traded-fund value, and up to 75% of debt and fixed-maturity-plan value |
| Interest basis | State Bank of India YONO: 1 percentage point above the related time-deposit rate, with daily reducing-balance interest | Lender-specific; published examples range from 9.50% starting at Federal Bank (indicative) to 10.75%–11.75% at ICICI Bank |
| Interest when unused | Overdraft and daily-reducing-balance treatment are described by State Bank of India; confirm whether any linked account fee applies | State Bank of India, Federal Bank and ICICI Bank describe charging interest on the amount used in their overdraft-style products |
| Market or margin risk | No NAV margin call, although repayment remains required and the deposit is locked by the lien | A NAV decline can reduce drawing power, require additional collateral or repayment, and lead to sale of pledged units under the contract |
| Typical eligibility limits | Depends on the deposit product and lender | Approved schemes, KYC, account and residency rules apply; some lenders exclude ELSS and other non-approved funds |
| Illustrative fees and term | State Bank of India YONO states zero processing charge and no prepayment penalty; confirm the particular deposit’s term and closure rules | Federal Bank lists 0.50% processing (₹1,500 minimum, ₹7,500 maximum), ₹1,000 renewal plus taxes, a 12-month tenure and no prepayment or closure charge. State Bank of India lists 0.50% processing (₹1,000 minimum, ₹10,000 maximum) plus GST and a 12-month term |
The figures are lender disclosures, not a market average. A sanction letter and Key Fact Statement (where supplied) control your transaction.
Which option is cheaper?
There is no reliable universal answer. Compare the total rupee cost for the amount and period you actually expect to use, not just the headline rate.
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How an FD loan is priced
With the State Bank of India YONO example, the borrowing rate is linked to the rate on the pledged deposit plus one percentage point. Ask the bank to show the calculation for your exact deposit, including whether the rate changes when the deposit renews. Daily reducing-balance interest means the charge falls as you repay principal.
How an LAMF is priced
LAMF pricing is lender- and product-specific. State Bank of India’s published materials contain two different snapshots: its rate table reports an effective 9.95% (one-year MCLR of 8.70% plus 1.25%), marked effective from 15 August 2025 and last updated 16 December 2025, while its dedicated mutual-fund page states 11.50% per year effective 1 April 2025. Treat these as a disclosure conflict or different update states, not as one universal current rate. Obtain a dated written quote before applying. ICICI Bank’s FAQ lists 10.75%–11.75% per year, and Federal Bank describes a starting rate of 9.50% that is indicative rather than guaranteed for every applicant.
Because an overdraft can charge only on the utilized balance, an LAMF may cost less than a fully drawn term loan when you make brief, irregular withdrawals. That advantage can disappear through processing, renewal, pledge, stamp, tax or account charges, or if you keep the balance outstanding for a long time.
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A simple cost calculation
Request two written illustrations for the same principal and duration. Add interest on the expected daily balance to every one-time and recurring charge, then subtract no fee unless the lender confirms it in writing. Compare the resulting rupee amount and the effective annualized cost. A lower nominal rate with a large minimum processing fee may be more expensive for a small draw.
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The advance percentage is applied to the lender’s accepted collateral value, not automatically to every investment you own. State Bank of India and Federal Bank disclose category-based limits of 50% for equity, hybrid and ETF holdings and 75% for debt and FMP holdings. State Bank of India’s YONO FD example states up to 90% of eligible deposit value.
Do not assume that a broader statement on a product page overrides the scheme-level calculation. ICICI Bank’s page includes 80% language in some sections, so confirm the exact category, valuation method and sanctioned limit for your units. The lender may also reduce the value for concentration, ineligible schemes or changes in its approved list.
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What happens if your mutual-fund value falls?
- Drawing power is recalculated. A lower NAV reduces the value supporting the overdraft.
- The account can become overdrawn. If your outstanding balance exceeds the revised limit, the lender may mark a shortfall.
- You receive a cure requirement. The contract may require you to add eligible units, repay part of the balance or do both within a specified period.
- Pledged units may be sold. If you do not cure the shortfall, the lender can liquidate collateral under the applicable agreement. The sale may occur during a market decline and can create a tax consequence or crystallize a loss.
Ask for the margin percentage, valuation frequency, notification method, cure period and liquidation authority before signing. Keep a cash buffer rather than borrowing up to the initial maximum.
Eligibility and practical restrictions
FD-backed borrowing
- Verify that the deposit type is accepted and that the deposit is held with the lending institution or can be linked to it.
- Confirm whether joint holders must sign, whether the deposit can be renewed during the loan and how the lien is released.
- Check the maximum percentage and minimum loan amount for your specific deposit.
Mutual-fund-backed borrowing
- Check the lender’s approved-scheme list before assuming a fund qualifies.
- Confirm matching name, PAN, KYC and holding-account requirements. State Bank of India’s cited online product excludes NRIs; Federal Bank excludes ELSS and non-approved funds in its disclosures.
- Ask how units are pledged, whether fresh purchases can be added, and how long release takes after final repayment.
When an FD loan is usually the better fit
- You already have a suitable time deposit and want a rate tied to that deposit rather than a market-linked collateral value.
- You need a predictable limit and cannot risk a margin call.
- Your borrowing period is long enough that the overdraft flexibility of an LAMF would not offset its higher rate or fees.
- You can leave the pledged principal inaccessible until repayment.
The trade-off is liquidity inside the deposit: the lien restricts withdrawal, and the loan still has to be serviced even though the deposit continues to earn interest.
When an LAMF may make more sense
- Avoiding redemption matters because selling would disrupt your investment allocation or realization timing.
- Your schemes are accepted and you need a revolving facility for short, intermittent draws.
- You can monitor NAV and maintain spare collateral or cash to meet a shortfall quickly.
- The lender’s all-in written cost is lower for your expected utilization than the FD alternative.
Keeping the units invested does not guarantee that their return will exceed the borrowing cost. Long-term borrowing, or borrowing to invest, requires a separate affordability and risk assessment; these facilities do not remove investment risk.
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Questions to put to the lender
- What is the current annual rate, benchmark, spread and effective annualized cost for my exact facility?
- Which units or deposit are eligible, and how is collateral value calculated?
- What is the sanctioned limit, and can it change automatically?
- Is interest charged only on the utilized overdraft balance? What are the debit frequency and minimum interest rules?
- List every processing, renewal, pledge, stamp, tax, account, prepayment and closure charge.
- For an LAMF, what margin triggers a top-up, part repayment or liquidation, and how much notice is provided?
- What happens if a scheme is removed from the approved list or the FD renews?
- How are draws and repayments made, and when is the lien or pledge released after the final payment?
- What is the tenure, renewal process and consequence of failing to renew?
Regulatory and documentation caution
The Reserve Bank of India’s 1998 circular, DBOD.No. Dir.BC.90/13.07.05/98-99, contains historical guidance that advances should be linked to NAV or repurchase price, or market value, whichever is lower. It should not be treated as a single current LTV rule for every lender and product. Current lender terms and applicable directions must be checked.
Read the sanction letter, pledge or lien agreement, schedule of charges and Key Fact Statement before accepting. Marketing pages can be updated at different times, as the conflicting State Bank of India rate disclosures demonstrate.
Quick Recap
A decision process you can use
- Set the borrowing pattern. Record the amount, likely daily balance and expected repayment date.
- Confirm collateral. Check FD eligibility or obtain written confirmation that each mutual-fund scheme qualifies.
- Collect comparable quotes. Ask for rate, APR or effective cost, limits, margin rules and every charge in writing.
- Stress-test the facility. For LAMF, model a substantial NAV fall and the cash or extra units you could provide. For an FD loan, model loss of access to the deposit and a missed repayment.
- Choose the affordable option. Reject any facility whose repayment depends on uncertain investment returns or a future refinancing assumption.
- Monitor after drawdown. Track the utilized balance, interest debits, collateral value, renewal date and release confirmation.
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