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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.
Interest rates charged by bank depends on the borrowers overall profile such as credit history, financial stability, etc. When you take a loan against your MFs, you still own them; you just can’t sell them till you repay your loan.
You can expect to repay the loan at an interest rate of 10-11% on the mutual fund units generally it is MCLR + 2-3% . Of course, this will be subject to terms and conditions set by the financier and loan tenure. Since it is a secured loan, the interest rate will be much lower than that of unsecured personal loans. Also, if your credit score is good or you have been a longstanding bank customer, the bank manager might agree to lower interest rate even more.
Many online portals sanction loans quickly if you hold units in the demat form and have prior permission. In case you hold units in the physical form, a loan agreement with the financier/bank should be in place.
The lender asks mutual fund registrar like Karvy Computershare Ltd is Registrar and Transfer Agent for fund houses such as Reliance, UTI, Principal, LIC, TATA and several other Mutual Funds. Franklin Templeton International Services (India) Pvt. Ltd is the in-house R&T for Franklin Templeton Mutual Funds to mark a lien on the number of units being pledged. The registrar then marks the lien and sends a letter to the lender with a copy to the borrower confirming the lien. An important thing to keep in mind is that the lien is marked against the units, and not the amount. You cannot redeem the units before you completely repay the loan.
It is important to note that the amount of money that you can get depends on the type of mutual fund you own. For instance, equity-based funds can fetch you close to 50% of the Net Asset Value of your funds. Some banks also have a maximum and minimum cap on the loan amount that that you can apply for.
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.
A 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 investor must fill up the application form for marking 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.
The amount given as loan will be lower than the market value of the units held by the borrower. This is called the margin. Typically, margin on equity funds is up to 50-60% of the value of the mutual fund units and in case of debt funds up to 75-80% of the NAV.
A lien can be revoked only 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.
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 collateral mutual fund units.
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