How to take a loan against MFs instead of breaking it when you need cash
If you run short of cash and plan to withdraw your mutual fund investments, take a pause. There is another option: You can take a loan against mutual funds and not disrupt the long-term potential compounding of your investment. Several banks offer loans against mutual fund units at interest rates ranging from 10-15% per annum.
Many banks also have their mutual fund subsidiaries. But you don't necessarily need to be an investor in the bank's mutual fund scheme to avail of this loan facility. Every bank has its own list of fund houses, against which they are willing to lend.
If your fund is from one of these houses, you can take a loan. However, you need to have a savings bank account with the bank. Also, the bank account and the mutual fund account should have the identical PAN.
Typically, an equity mutual fund can fetch 50% of its value as a loan (loan-to-value ratio), while a debt mutual fund can fetch 75% of its value as a loan. You can avail of the loan from the bank's website. You must submit the mutual fund folio number, name of the scheme, the total number of units you want to pledge and the value of the units.
The details are vetted by the mutual fund registrar & transfer agent, which maintains records of all mutual fund transactions, and a lien is marked against the units pledged as collateral. A lien is a legal claim or right made against an asset held as collateral. The bank then sets up an overdraft facility.
This means you pay interest only on the amount utilised. The overdraft facility is typically valid for 12 months and can be renewed. Once your units have been marked for lien, they are not available for redeeming.
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