Article

Loan against Mutual Funds
June 07 , 2012

If you own units of mutual fund, loan can be availed by pledging them as collateral. Banks offer loan against financial securities like mutual fund units, bonds, NSC, PPF, life insurance policies, demat shares and so on.

Banks and NBFCs offer loan against units of mutual funds approved by them. Units must be owned by the applicant and must not be in the name of minor, trust or any other party. Loan may be granted for up to 50% of the net asset value (nav) of the fund. Higher limits are offered by some banks on debt mutual funds. These loans are issued for personal or business purposes. Minimum and maximum amount of loan against securities varies from bank to bank. It is usually in the range of Rs 2 lakhs to Rs 20 lakhs.

Such a loan against security is a much cheaper alternative to personal loans as interest rate on them is far less than on personal loan. Interest rate is most commonly linked to the bank’s base rate so as often as it changes the interest rate applicable would vary. Majority of the times financing is done as an overdraft in which case interest will be payable only on the outstanding amount. Banks may also lend against mutual fund units as term loans.

While pledging units as collateral the mutual fund AMC makes note of such pledged units. Such units are termed as lien-marked. While marking lien on the units the number of units being marked must be specified. Such units become property of the bank/financial institution and the unit holder cannot redeem or transfer the units until the time it is lien-marked. In case of mutual funds with dividend option, dividend will continue to be paid although units may be pledged as collateral. When the loan is repaid the units become free of lien.

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