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How to Avoid Margin Calls in Loan Against Mutual Funds
What is a Margin Call in LAMF?
A margin call in Loan Against Mutual Funds (LAMF) occurs when the value of your pledged mutual fund units falls below the required loan-to-value (LTV) threshold. This usually happens due to market volatility, especially in equity funds. When this happens, lenders may ask you to either repay a part of the loan or pledge additional units.
Why Margin Calls Happen
Mutual funds are market-linked instruments. If the NAV of your pledged funds declines significantly, the collateral value reduces. Since LAMF is a secured loan, lenders must maintain a minimum collateral buffer, which triggers a margin call when breached.
Practical Ways to Avoid Margin Calls
The best way to avoid margin calls is to maintain a healthy buffer above the maximum LTV. Instead of borrowing the full eligible amount, keep a margin cushion so that temporary market fluctuations do not immediately trigger a call.
Diversifying your pledged portfolio can also help. Debt funds are generally more stable than equity funds, so a mix of both can reduce volatility risk.
Regular monitoring is essential. Keep track of your portfolio value and market movements so you can take action early if your LTV starts approaching the limit.
Maintain a Conservative LTV
Avoid using the maximum available limit. For example, if your lender allows up to 50% LTV on equity funds, consider borrowing only 30–40%. This buffer protects you from sudden market corrections.
Keep Emergency Liquidity Ready
Always have a backup plan. If markets fall sharply, you should be able to quickly add more collateral or repay part of the loan to avoid forced liquidation.
Choose the Right Funds
If you anticipate volatility, consider pledging relatively stable funds such as debt or hybrid funds instead of highly volatile equity funds.
Act Quickly on Alerts
Most lenders notify borrowers when LTV levels approach risk thresholds. Acting early on these alerts can help you prevent a full margin call.
Why It Matters
Avoiding margin calls helps you retain control over your investments. If a margin call is not addressed in time, lenders may liquidate your pledged units, which can disrupt your financial planning and trigger tax implications.
Loan Against Mutual Fund is subject to applicable interest rates and credit assessment. Mutual fund units pledged as collateral are subject to market risks. Please read all loan-related documents carefully.
