How to pledge your Mutual Fund Units and borrow against them?

If you want to borrow against them, this is how you go about marking a lien

Investors can pledge their mutual fund units with banks and other financial institutions, to borrow funds.

To do so, a lien has to be marked against the units. Lien refers to the right of the financier to take and hold or sell the property of a debtor as security or payment for a debt. How to go about it?

Marking a lien

An investor can approach a financier/banker and get a loan or overdraft facility sanctioned by pledging his/her mutual fund units as security.

The investor should then send a letter to the Mutual Fund/Registrar requesting the fund to mark a lien on the units in favour of the financier.

The letter should clearly state the name of the investor, as in the mutual fund records, the folio number, scheme and the number of units for which lien is to be marked.

This should be signed by the unit holders according to the mode of holding, i.e. by all holders for joint holding and accompanied by a letter from the financier stating the above.

If the investor is a non-individual entity, board resolution/partnership deed authorising the concerned person for pledging the units should be submitted.

The lien is marked on units, hence the request to mark lien will be rejected if only an amount is mentioned in the letter.

The fund/scheme/number of units mentioned in the letter from the financier should tally with that of the investor.

The number of clear units available for marking lien (i.e. units not locked due to being tax saving schemes, etc.) should be equal to or more than the number of units pledged.

The Registrar will mark the lien and send a letter to the financier with a copy to the investor confirming the marking of a lien.

The financier can also ask for the removal of the lien and send a request letter to the fund.

This request should clearly state the name of the investor, fund, folio number, scheme and the number of units for which the lien should be removed.

A financier can request partial removal of lien too on some of the units. These units would then become ‘free’ units.

Normal, Dynamic

If the financier in his letter of request for marking a lien mentions only the number of units on which the lien is to be marked, it would be a normal lien. This would mean that any dividends reinvested or any future accrual in the scheme would be free and not under lien. However, if the request specifically states that future accruals to the existing investment, such as dividend reinvestment, are to be marked under lien, then it would be a dynamic lien.

If the borrower defaults in making payment, the financier can enforce the lien, i.e. request the mutual fund to redeem the units and they will send the proceeds/cheque to the financier.

(Contributed by CAMS Viveka, an Investor Education Initiative from CAMS. The views expressed are general practices in the mutual fund industry.)

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Sudarshan Ranganthan

Breaths Investments, Suggests Wealth Creation Ideas, Lives on Law Of Attraction

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