Can Mutual Fund Investments be Pledged as Collateral?

With the potential for significant returns and portfolio diversification, mutual funds have become a go-to investment for many investors. But did you know mutual funds have monetary value besides interest, dividends, and capital gains?

What if you could pledge your mutual fund units as collateral to secure a loan instead of selling them to settle your financial obligations? Can you really take a loan against your investment? Is it a wise thing to do so? How does a loan on mutual funds work? Let’s explore answers to all these questions in this blog.

Can you get a loan on mutual funds?

Yes, you can borrow a loan against your mutual fund investments. When you pledge your mutual funds units to secure a loan, the lender sets up a lien over those units.

A lien refers to the legal claim or right granted to a lender over the security pledged by a borrower. It helps lenders recover their money if the borrower defaults on the loan.

But what’s the loan-to-value ratio for a loan on mutual funds? The collateral margin against mutual funds depends on the lender’s policy and your creditworthiness. Generally, lenders provide a loan amount ranging from 50% to 70% of the value of the securities.

How does a loan on mutual funds work?

When you pledge mutual fund units as collateral for a loan, you cannot redeem them until you repay the loan in full. Although you cannot sell or withdraw the mutual fund units during this period, you will continue to collect interest and earn dividends on them.

Once you repay the loan in full, the financier can ask the fund house to release the lien. But if you only pay a part of the loan amount, the lender may allow a partial discharge of the lien. This means only some mutual fund units will be released, while others will still be held as collateral until you repay the remaining loan amount.

Also, it is crucial to remember that the lien can only be revoked at the lender's instruction. The financial institution must confirm that the borrower has repaid the loan and that the collateral can be released in their favour.

However, if you fail to repay the loan, the bank can invoke the lien and seek redemption of the units under the lien to recover the outstanding loan amount.

To conclude

 Pledging mutual funds as collateral can help you meet your short-term financial needs while maintaining your progress towards achieving your other financial goals.

You have plenty of options for a loan against a mutual fund. But it is essential to pick one that is committed to providing loans without hassle. That is why you should look no further than Tata Capital Moneyfy.

We offer loans against securities, including mutual funds, at competitive interest rates. We charge zero convenience fees, prepayment charges & foreclosure charges. Besides, our application process is 100% digital and requires minimal documentation.

If you want to know more about obtaining a loan on mutual funds, visit the Tata Capital Moneyfy website or download the mutual fund app from the Play Store today.