PAPER WORK
Loan against MF investments
A loan against mutual funds is an effective way for investors to access liquidity without redeeming their investments. This facility allows individuals to pledge their mutual fund holdings as collateral to secure a loan from banks or financial institutions. This is ideal for short-term liquidity needs.
Check eligibility
Investors should check with banks and NBFCs that offer loans against mutual funds because all schemes are not eligible for pledging. Lenders generally prefer large-cap equity funds, debt funds, or liquid funds due to their lower volatility.
Loan application
The application process can be completed online or at a branch office. The investor must submit a loan application form, along with the details of the mutual fund holdings. Some lenders offer this facility through a digital platform integrated with registrar and transfer agents (RTAs), like CAMS and KFintech.
Pledging of units
The borrower must pledge mutual funds by creating a lien in favour of the lender by submitting a lien request to the respective mutual fund house or depository (in case of demat holdings). The lender then gains control over the pledged units as security for the loan.
Disbursement
Upon successful verification, the lender sanctions the loan amount based on a loan to value (LTV) ratio, typically 50-70% of the NAV for equity funds and up to 80% for debt funds. The funds are then disbursed to the borrower’s account.
Points to note
- Interest rates on such loans are lower than those in personal loans, but vary according to the lender and fund type.
- If the mutual fund NAV falls, the lender may request additional collateral or partial loan repayment.
Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
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