An investor in a mutual fund may obtain a loan against their current units. Investors can use their mutual fund units as collateral to secure loans from lenders such as banks & non-banking financial companies to borrow money against the value of the units already owned.
A lien on the units must be placed against them to borrow the money. It is possible to place a lien on all or part of the units included inside a folio. When a lender has a lien on a debtor’s property, the lender has the right to take possession of the property and sell it as security or payment for the debt owed. The unitholder must first contact the lending institution to obtain a loan or an overdraft facility.
Steps involved in putting a lien on mutual fund units
An investor who wishes to have a lien placed on mutual fund units must write to the Mutual Fund house or registrar, stating their name, the folio number of the mutual fund unit in question, and the number of units in question for which a lien is to be placed, to have a lien placed on the mutual fund units in question in favour of the lender. The unit holder must sign according to the mode of holding, which is determined by whether the holding is single, joint, or anybody, or whether the holding is a survivor. The letter must also be followed by a verification letter from the lender, which confirms all of the information in the letter. If the investor is a business entity rather than an individual, the partnership deed or board resolution authorising the pledging of mutual fund units must be supplied with the authorised signatory or signatories.
It is vital to emphasize that the lien is recorded on the units themselves rather than on the sum owed. Furthermore, no units can be redeemed until the loan has been fully repaid.
Following verification, the registrar will place a lien on the property and send a letter to the lender, with a copy sent to the investor.
After receiving the payments, the lender can request that the fund house release the lien on the units in question. Similarly, in the case of partial payments, the same rules apply.
If the borrower fails to repay the loan, the same lien might be enforced against them. This is the scenario when the lender writes to the Mutual Fund, demanding that the fund redeem all of the units and deliver him the sale proceeds.
Procedure for obtaining such a loan
As is the case with other loans, when a house or gold is used as collateral to borrow money, mutual fund units in demat accounts are used as collateral with banks in this situation.
Each financial institution will now have a list of mutual funds approved and against which they are willing to make loans to individual investors.
Furthermore, to be eligible for such a loan, investors must first agree with the bank and the mutual fund company, which guarantees that the fund will be sold if the investor cannot make payments in the future as agreed.
A lien is a legal agreement or contract that protects one’s property. The agreement is signed to ensure that investors do not withdraw money from the mutual fund scheme before completing their repayment to the lending institution. If a borrower cannot pay, the lender has the authority to sell the cash under the terms of this arrangement.
To obtain such loans, you must first approach the fund house and request that a lien be placed on your investment in the name of the lending institution. You can apply for loans online and offline, depending on your preference.
Amount of money that can be borrowed
When borrowing money from a mutual fund, the quantity of money one can borrow depends on the size of one’s portfolio and the type of mutual funds one owns. In most cases, debt funds can yield up to 80 per cent of the overall investment value, whereas equity funds can yield up to 60 per cent of the total investment value. The shares of firms held by equity-oriented mutual funds are invested in, whilst debt-oriented mutual funds are invested in fixed-income assets such as government bonds and other similar instruments.
The loan amount that a consumer is eligible for, on the other hand, varies from bank to bank. Some banks may offer a loan equal to 50% of the net asset value of your mutual fund, while others may offer a loan equal to 60% of the value of your mutual fund’s net asset value.
One advantage is that, even though you cannot redeem your funds since you have retained them as a security for the lender, you will continue to be invested and earn interest and dividends, if any.
The advantages of borrowing against mutual funds are as follows:
Provides you with instant liquidity in exchange for your mutual fund investment.
Allows you to raise short-term funds to meet your financial obligations.
In the event of an emergency, you will not have to redeem your mutual fund investments.
Maintain the integrity of your financial plan.
This article should give you a good idea of pledge mutual funds, Mutual funds India, Online mutual fund and how to pledge mutual fund
FAQs
Where can I pledge my mutual funds?
Most banks and NBFCs (Non-Banking Financial Companies) offer loans against mutual funds. You can contact your bank or NBFC to confirm whether they offer loans against mutual funds.
What is the maximum loan amount provided on pledging mutual funds?
The maximum loan provided on pledging mutual funds depends on the size of your mutual fund portfolio and the type of schemes you own. In most cases, equity funds can offer up to 60% of the investment value, and debt funds can offer up to 80% of the overall investment value.
What are the eligibility criteria to get a loan against mutual funds?
The basic eligibility criteria to get a loan against mutual funds are:
- Should be of minimum 21 years of age
- Should be an Indian resident
- Should be a salaried or self-employed individual
- Mutual funds you hold must be eligible for pledging
Are all the mutual funds eligible for pledging?
No. Not all mutual funds are eligible for pledging. You can contact your bank or NBFC to check if your mutual funds are eligible for pledging.
What should I check before pledging mutual funds?
Before pledging your mutual funds, you should carefully evaluate your financial situation, the terms and conditions of the loan, and the potential risks involved. It is advisable to seek advice from a financial advisor to understand the implications of pledging mutual funds.
What happens if I pledge my mutual funds and do not repay on time?
If you don’t repay the loan on time then the lender can sell the pledged mutual fund units to recover the dues.
