A Loan Against Mutual Funds does not work like a personal loan- there are no fixed monthly EMIs to pay. But that does not mean there are no repayment obligations. Borrowers are required to pay monthly interest on time, keep the loan within the permitted LTV ratio as fund values change, and repay the full principal by the end of the loan tenure.
When any of these obligations are not met, the lender may take action - from charging penalties to selling the pledged mutual fund units. This article explains exactly what happens at each stage, what the consequences are, and most importantly - what can be done to avoid or recover from the situation.
Three Ways a LAMF Can Go Into Default
| Default Trigger | What It Means | What to Watch |
|---|---|---|
| Missed interest payment | Monthly interest is auto-debited. If the debit fails, penalty charges apply and the account may move towards default | Ensure sufficient bank balance on the due date every month |
| Unresolved LTV breach | If NAV falls and the loan exceeds the eligible LTV, a margin call is issued. If unresolved, pledged units may be sold | Monitor fund value regularly and respond quickly to margin call notices |
| Non-repayment at tenure end | The full outstanding principal must be repaid when the 36-month tenure ends. If not, the lender may liquidate pledged units | Plan principal repayment well before the loan maturity date |
What Happens When You Miss an Interest Payment?
Monthly interest is auto-debited from the bank account linked to the loan. If the debit fails due to insufficient balance, a failed mandate, or any technical reason, the following sequence begins:
The interest amount remains outstanding. A bounce charge is applied immediately.
SLiQ notifies the borrower via SMS, email, or WhatsApp. Paying the overdue amount at this stage (within 3 days) stops any further escalation.
The overdue amount starts accruing interest at a penal rate, significantly higher than the regular loan rate. The longer it remains unpaid, the larger the total amount owed.
If the interest remains unpaid for 90 days or more, the loan account may be classified as a Non-Performing Asset (NPA) by the lender. At this point, the lender may report the default to credit bureaus - CIBIL, Experian, and CRIF High Mark which will significantly impact the borrower's credit score.
What Happens During an LTV Breach (Margin Call)?
An LTV breach occurs when the NAV of pledged mutual fund units falls, causing the outstanding loan to exceed the permitted loan-to-value ratio.
A borrower pledges equity funds worth Rs 10 lakh at 50% LTV, drawing Rs 5 lakh. The market falls 20% - the funds are now worth Rs 8 lakh. The Rs 5 lakh loan now represents 62.5% of the portfolio value, breaching the 50% LTV limit.
SLiQ and the lender notify the borrower of the shortfall, specifying the amount that needs to be restored.
During this period, the borrower can either:
- Repay part of the outstanding loan to bring the LTV back within the permitted limit, or
- Pledge additional eligible mutual fund units as additional collateral
If the borrower does not act within the stipulated period, the lender will sell (redeem) a portion of the pledged mutual fund units to recover the shortfall. Only enough units are sold to bring the LTV back to the permitted level, not the entire pledged portfolio.
A margin call is not a default. It is an early warning. Responding promptly almost always prevents the situation from escalating to forced liquidation.
What Happens at the End of the Loan Tenure?
SLiQ's LAMF facility has a maximum tenure of 36 months. By the end of this period, the full outstanding principal along with any unpaid interest must be repaid.
If the loan is not repaid by the maturity date, the lender can redeem the pledged mutual fund units to recover the outstanding amount. The redemption proceeds go to the lender. Any surplus remaining after clearing all dues is credited to the borrower's registered bank account.
Borrowers who anticipate difficulty in repaying by the maturity date should contact SLiQ before the tenure ends. Renewal or restructuring may be available depending on the lender's policy and the borrower's repayment history.
Forced Liquidation: How It Works
Forced liquidation is the lender's last resort, it happens only when a margin call or repayment demand has gone unresolved.
The process:
- The lender raises a redemption request with the RTA - CAMS or KFintech - for the pledged mutual fund units
- The RTA processes the redemption at the applicable NAV on the date of the request
- The proceeds are applied to recover the outstanding loan dues
- Only the minimum number of units required to cover the shortfall are redeemed - the rest remain pledged
- Any surplus after clearing all dues is credited to the borrower's registered bank account
Which units are sold first? Generally, the lender sells units from the lowest-NAV funds first- this maximises the number of rupees raised per unit sold. This process is automated and does not require the borrower's approval at the time of sale.
Tax on Forced Liquidation
This is a critical point that many borrowers overlook: the tax liability on forced liquidation falls on the borrower, not the lender. Even though the investor did not initiate the sale, it is treated as a redemption under Indian income tax law.
| Fund Type | Holding Period | Tax |
|---|---|---|
| Equity funds | Less than 12 months | STCG at 20% |
| Equity funds | 12 months or more | LTCG at 12.5% on gains above Rs 1.25 lakh/year |
| Debt funds (purchased after 1 April 2023) | Any | Taxed at income slab rate |
| Debt funds (purchased before 1 April 2023) | More than 24 months | 12.5% without indexation |
The holding period is calculated from the original purchase date of the units - not from the date they were pledged.
Impact on Credit Score
| Situation | Credit Score Impact |
|---|---|
| Margin call issued (LTV breach) | No impact - margin calls are not reported to credit bureaus |
| Single missed interest payment | Possible impact if reported after delinquency period |
| 90+ days overdue (NPA classification) | Significant negative impact - reported to CIBIL and other bureaus |
| Account written off | Severe and long-lasting impact - may remain on credit report for years |
| Loan settled (one-time settlement) | Shows as "Settled" - negative, but better than written-off |
SLiQ does not run a hard CIBIL inquiry at the time of application but a default on the loan will be reported to credit bureaus by the lender, which is entirely separate.
How to Get Back on Track
Transfer the overdue interest amount to the linked bank account immediately. Contact SLiQ's support team on WhatsApp/ Call- the team can guide the next steps and help prevent escalation.
Act within the stipulated window. Options include partial repayment to reduce the outstanding balance or pledging additional eligible mutual fund units to restore the LTV. Do not ignore a margin call notice.
Pay as much of the overdue amount as possible - even a partial payment can slow down escalation. Contact the lender through SLiQ to discuss restructuring or a repayment plan.
Contact SLiQ before the maturity date. Some lenders offer renewal or restructuring. Voluntary partial redemption of pledged units may also be preferable to waiting for forced liquidation — it gives the borrower more control over the timing and NAV at which units are sold.
How to Avoid Defaulting in the First Place
- Borrow within limits: Do not draw the maximum eligible amount. Keeping the utilisation at 60–65% of the credit limit provides a buffer against NAV falls and reduces margin call risk.
- Keep the linked bank account funded: Set aside the monthly interest amount before the auto-debit date every month. The interest on a LAMF is predictable — plan for it.
- Monitor the portfolio value regularly: Market movements affect the LTV ratio dynamically. SLiQ's platform provides visibility into the current loan position. Check it periodically, especially during periods of market volatility.
- Have a repayment plan: The LAMF structure (no fixed EMI) can create a false sense of flexibility. Plan how and when the principal will be repaid before the 36-month tenure ends.
- Respond to communications promptly: Whether it is a margin call notice, an overdue reminder, or a renewal alert — quick action almost always prevents a manageable situation from becoming a serious one.
Frequently Asked Questions
Yes. When a borrower takes a LAMF, the loan agreement authorises the lender to sell pledged units if there is an unresolved LTV breach, missed repayment, or non-repayment at tenure end. The lender is not required to seek fresh approval at the time of sale.
A single missed payment may not immediately impact the credit score if resolved quickly. However, if the account remains unpaid for 90 days or more, it may be classified as an NPA and reported to credit bureaus which will significantly impact the CIBIL score.
No. A margin call is an internal lender action triggered by LTV movement. It is not reported to credit bureaus. Only actual payment defaults and NPA classifications affect the credit score.
If the value of the pledged units is insufficient to cover the full outstanding dues- for example, during a severe market crash - the borrower remains liable for the remaining balance. The lender may pursue recovery separately and may also report the shortfall as a default to credit bureaus.
Yes. SLiQ charges zero prepayment or foreclosure charges. The loan can be fully repaid and closed at any time. Early closure eliminates all ongoing risk - LTV breach risk, margin call risk, and tenure-end repayment risk.
The borrower pays the tax. Forced liquidation is treated as a redemption under Indian income tax law. Capital gains tax applies based on the type of fund and the holding period from the original purchase date regardless of the fact that the investor did not choose to sell.
A LAMF default is almost never sudden - it follows a sequence of warning signs that give the borrower multiple opportunities to act. Timely interest payments, proactive monitoring of the loan-to-value position, and early communication with SLiQ's support team can prevent most situations from escalating to forced liquidation or credit score damage.
For any concerns about an existing loan, SLiQ's loan specialists are available on WhatsApp at all times.
sliqfin.com | +91-9136542858 | lasinfo@sliqfin.com | Backed by Rainmatter (Zerodha)
Disclaimer: The information in this article is for general informational purposes only. Specific charges, timelines, and lender policies may vary. Tax treatment is based on Indian income tax provisions as of FY 2025-26 and is subject to change. Please consult a qualified financial or tax advisor for advice specific to your situation.
