Did you know that the investment you are making in any mutual fund either through a systematic investment plan (SIP) or a through a lump sum investment can also act as a contingency fund? During emergencies, liquidating your mutual fund investment is not the only option.

You can avail loans from banks or NBFCs by opting for a loan against mutual funds instead of, say, a personal loan at a high interest rate. So, here is everything you need to know about loan against mutual funds.

How does loan against mutual funds work?
You can approach a bank or non-banking financial company (NBFC) and request for a loan or overdraft against your mutual fund investments. The bank would consider your loan request after seeking a lien on the units in the name of the bank. The loan will be offered to you depending on the value of units held in the folio of your mutual fund account.

Once you repay the loan, the bank will lift the lien and you get the rightful ownership of your mutual fund units.

Understanding lien for mutual fund loans
Lien is nothing but a document that gives the bank the right of ownership to hold or sell the funds. Therefore, when you mark a lien in favour of the bank, you effectively give the bank the right of ownership of the fund units you own.

To request for a lien transfer to the bank, you will have to approach your mutual fund house and request for a lien on your units in favour of your bank. The request letter for the lien should be signed by all unit holders if your mutual fund is jointly held.

Availability of loan against mutual funds
The amount of money you can get as a loan against mutual funds depends on the type of fund you own. For equity-based mutual funds, you can get as much as 50% lending on the Net Asset Value (NAV) of your funds. Some banks have limits on the minimum and maximum loan amount you can avail when opting for loan against mutual funds.

Most public sector banks, private banks and big NBFCs offer loan against securities, under which loans against mutual funds are categorised. The interest rates for loan against mutual funds can be a little lower than personal loans, but in most cases, the applicable interest rate is decided by the bank after weighing the risk in each
application.

Things to know before opting for a loan against mutual fund
Before approaching a bank to avail loan on your mutual fund investments, following are some essential aspects one must keep in mind:

-Not all mutual fund units are eligible for a loan. Loans are granted only against the list of approved mutual funds or mutual fund schemes as determined by your respective bank.
-Mutual fund loans are available for both equity and debt funds, but check whether your mutual fund is approved by your bank for loan.
-While almost all banks offer loan against mutual funds, Reserve Bank of India rules state that only NBFCs with assets of more than Rs 100 crore can offer such a loan.
-You cannot redeem any fund units during the loan tenure but you can continue to receive dividends.
-If you default on your loan, the bank can invoke the lien and request the mutual fund company to redeem your units for loan repayment.

Loans against mutual funds are rarely used since many borrowers are not aware of such a loan provision. The next time you look to raise funds for an emergency, remember that a loan against your mutual fund investments can be a
better option than some of the traditional avenues.

All you need to know
– The bank would consider your loan request after seeking a lien on the units in the name of the bank
– Lien is nothing but a document that gives the bank the right of ownership to hold or sell the funds
– The loan will be offered to you depending on the value of units held in the folio of your mutual fund account
– Once you repay the loan, the bank will lift the lien and you get the rightful ownership of your mutual fund units
– The amount of money you can get as a loan against mutual funds depends on the type of fund you own

The writer is CEO, BankBazaar.com