Up next
What is Risk-to-Reward Ratio?
Availing of a loan against mutual funds—instead of redeeming them—is a suitable option to address any financial needs. For this, an investor will have to pledge their mutual fund units to the banking or non-banking financial institution (NBFC) from where they aim to avail of the loan.
The mutual fund units can either be in Demat (dematerialised) or physical form. In a case where the units are in Demat form, the units will have to be pledged with the depositories, which could be National Securities Depository Ltd (NSDL) or Central Depository (India) Ltd (CDSL).
For units in physical form, then the bank or NBFC will ask the Registrar and Transfer Agency (RTA), which is Computer Age Management Services Ltd (CAMS) or Karvy, to mark a lien on the units pledged with the bank or NBFC. Lien is the right given to the lender to recover money in case the credit given is not repaid as per agreed terms by the borrower.
Mutual units pledged on lien to the bank or NBFC, cannot be redeemed until the loan account is closed. However, the ownership of mutual fund units is retained, including all the benefits associated with them.
The loan amount will depend on the type of mutual fund scheme against which an individual wants to avail of the loan. Generally, it is about 50% of the value of pledged equity or hybrid mutual fund scheme, subject to the maximum loan limit as specified by the bank or NBFC.
The interest rate on loans against mutual funds will depend on the current marginal cost of funds-based lending rates (MCLR) of the bank and the spread above MCLR. MCLR will depend on prevailing interest rates.
It is also possible to secure online loan facilities against mutual funds. An individual can visit the official website of the bank or NBFC, provide the Permanent Account Number (PAN) and Aadhar details and follow the steps as mentioned on the site.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
