Borrow Against Your MF Units?
In times of financial crisis, why stop your Systematic investment plan (SIP) or redeem your MFs, when you can take a loan against your MF units? As mentioned in the previous article, borrowing against Your MF Units is possible. Watch this video from CAMS and read the concept explained by ET to know more on Lien Marking:
1. From where can you get a loan against your mutual fund units?
You can take a loan from a financier which could be a bank or a non-banking finance company (NBFC) by pledging your mutual fund units. You can pay back the loan at the interest rate agreed with the financier. During the tenure when the units are under lien, you cannot redeem or switch the units.
2. What is the process?
As a first step you need to execute a loan agreement with your financier. The financier will write to the mutual fund registrar like CAMS or Karvy and ask them to mark a lien on a certain number of units that are being pledged. Financiers typically lend about 60-70% of the value of the pledged units. The registrar in turn will mark the lien and a letter is sent to the financier with a copy to the investor confirming the marking of a lien on the units
3. How is the lien removed?
Once the loan is repaid, the financier can ask for the removal of the lien and send a request letter to the fund. This request should 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 also request for a partial removal of lien in which case, lien on some of the units will be removed and these units are ‘Free’ units. This can happen when financiers receive part payments.
4. What happens if the investor defaults in making a payment to the financier?
If the borrower defaults in making payment, the financer can enforce the lien i.e. send a signed request to the mutual fund to redeem the units and send the proceeds/cheque to the financier.
5. What is the advantage of a loan against mutual fund (LAMF)?
Loan against mutual funds gives you the option of receiving immediate liquidity against the mutual fund units that you own. It is like an overdraft facility for shortterm monetary requirements, with a relatively shorter tenure than other loans. It is a beneficial monetary tool for those looking to leverage their otherwise idle mutual fund investments, and also raise capital quickly for short term financing needs. You need not sell your mutual fund units, nor is your ownership of the fund units divested after pledging them for a loan.