Similar to borrowing against your insurance policy or shares, mutual funds also allow you to borrow funds against the units you hold in them. It is a facility similar to bank overdraft and in case of emergencies when you are in need of cash for short tenures ranging between three months to one year you can borrow by pledging your MF units with bank or NBFCs.
All of the equity, debt oriented, hybrid or liquid mutual fund units can be pledged with the financing company for borrowing funds. However, personal finance experts recommend borrowing against equity oriented schemes as against debt or liquid funds. Depending on the tenure as well as the loan amount, financing company usually charge an interest rate of 10-11% for borrowing against MF units.
Usually, the amount disbursed is 60-70% in value of the pledged MF units.
How to apply for a loan against your MF units?
In case the mutual fund units are held in a demat form, the sanctioning as well as disbursal of the loan against your mutual fund units is rather fast. Else if held in physical form, first a loan agreement has to be entered into with the financing company.
The financing company then asks the mutual fund registrar such as Karvy or CAMS to mark a lien on the number of units being pledged by the holder of mutual fund units. Upon confirmation of the marking of a lien on the units, financing company lends the amount.
The main advantage of borrowing against mutual funds is that it provides you immediate liquidity while your investments in MFs remain intact.