Yes, your Mutual Funds can be used as collateral against loans. These loans are called loan against securities/ LoanAgainst Mutual Funds units (LAMF). You can borrow money for short period instead of stopping Mutual Funds SIP or redeeming your Mutual Funds. You can avail a loan against mutual funds from Public sector banks, Private Banks and NBFC’s.
The interest would be around 10% – 13% depending on the bank and type of fund pledged.
You should send a letter to the Mutual Fund/ Registrar requesting to mark a lien on units in favour of the financer. Lien is a document that gives bank right of ownership to hold or sell funds. If you default the loan, lender can evoke the lien and recover the dues.
Mutual fund units pledged with the bank can’t be redeemed or switched, during the tenure of the loan, but the dividends earned would be credited to your account.
The amount of loan is linked to the Mutual Fund net asset value(NAV) and not to the face value. The extent of funding against Mutual Funds is around 40%-50% of NAV.
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