Loan against mutual fund units: All you need to know
Mutual fund investors can avail credit against their mutual fund investments. Loan against mutual fund units is in the form of an overdraft facility and interest is charged only on the amount availed as credit.
The loan can be availed via online or offline modes. Application process involves marking of lien on the mutual fund units in favour of the bank/financing institution. Once lien is marked, the units cannot be sold or redeemed by the investor.
Margin on funds
The amount given as loan will be lower than the market Value of the units held by the borrower. This is called the haircut or margin. Typically, margin on equity funds is up to 75-80% of the NAV (net asset value).
The investor must fill up the application form for marking a a lien providing the details like folio number, scheme Name, plan, option and the number of units. Once the documents are received, these are forwarded to the mutual fund registrar for lien marking.
First, a current account is opened with an overdraft facility. The investor can avail overdraft facility up to the value borrowing limit set for the account on the basis of the basis of the collateral mutual fund units.
Revoking of lien
A lien can be revoked if the bank/financing institution confirms in writing that the lien can be revoked and the collateral be released in favour of the borrower. In case the investor fails to repay the loan, the bank can invoke the lien and can seek redemption of units under lien, to recover the Loan.