Loan against Mutual Funds is a common financial service offered by financial service providers. With the growing popularity of loans and stiff competition in the financial market, Banks and NBFCs are coming up with many new ways of lending money to prospective borrowers. Loans against securities is one such way of availing loan; loan against mutual funds units is a subset of the same.
Secured loans can be procured by customers by pledging collateral as security. One of the most unique and comparatively new form of acceptable collateral is mutual fund units. Generally, banks offer loans at lower rates of interest as compared to unsecured loans if mutual fund units are pledged as security.
Major points regarding loans against mutual fund holdings
Some of the basic but significant points that customers need to know about loans that accept mutual fund units as security are listed below.
- Application for loan against mutual funds should be filed jointly by all the holders of a mutual fund unit.
- The amount of loan sanctioned by bank or any NBFC is a certain percentage of the net value of the fund units held. In case of equity funds, the margin of loan can be higher than 50% of the mutual fund value
- A lien is signed by the lender, through which the lender refers to its right to take hold of the property of the borrower and/or sell it in order to recover the loan amount
- The rate of interest charged by financial institutions on loans against mutual fund units is mostly lower than that charged on unsecured loans
- The dividends for mutual funds can continue to be paid to the borrower during the lien period however, no units can be sold and redeemed during the loan tenure
- If the borrower defaults on his or her loan then the lender has the right to sell the mutual fund units and redeem the loan amount
Advantages of availing loan against mutual fund units
has some major advantages which makes it a good buy for customers looking for a quick loan. Listed below are a few of these benefits.
- Convenient and immediate channel of credit in order to meet urgent financial expenses
- Lower rate of interest
- Interest is charged only on utilized amount of sanctioned loan
- Corporates can use interest paid on loans against mutual funds, to reduce their tax burden
What is a lien?
A lien is basically the right of the lender to take possession of and/or sell the mutual fund units against which a borrower has availed loan. A lien is used as security to cover the lender in case of loan default by the borrower.
Lien is marked by the registrar of the mutual funds, upon request by the borrower to mark his/her mutual fund units in favor of the lender.