How to Pledge Mutual Fund Investments?

Need urgent funds but do not want to sell your mutual fund investments? You are not alone. Many investors today are choosing to use mutual funds for loans instead of redeeming them. By lien marking MF, you can unlock liquidity without losing ownership of your investments, a smarter way to access funds while your portfolio continues to earn returns. Let us understand how to pledge mutual fund investments, the eligibility criteria, documents required, and the risks and costs involved.

Get quick liquidity without selling your investments. Apply for a loan against mutual funds and access funds in just a few hours.

Pledging mutual funds means using your existing mutual fund units as collateral to borrow money from a financial institution. Instead of redeeming your units, you temporarily assign them to the lender as security for the loan.

You continue to remain the owner of your mutual funds, but you can’t sell or redeem them until the loan is repaid in full. The value of your mutual fund holdings determines the maximum loan amount you can avail.

This process is a great alternative to liquidating long-term investments, especially during emergencies or when you need short-term working capital.

Not all mutual funds qualify for availing loans. Financial institutions generally accept only select mutual fund schemes that meet certain liquidity and valuation standards. Here are the types usually eligible:

• Equity mutual funds: Most large-cap and diversified funds are accepted.
• Debt mutual funds: Schemes with stable NAVs and lower risk are preferred.
• Hybrid mutual funds: Balanced or equity-oriented hybrid funds may also be eligible.
• Liquid and overnight funds: Typically accepted due to low volatility.

However, funds with high exposure to small-cap, thematic, or international assets might not qualify. Eligibility can vary depending on the lender’s approved list of mutual funds.

Leverage your approved mutual fund schemes today and unlock the value they hold. Apply now

Before you begin the pledging process, ensure you have the necessary documents ready. Most institutions require only basic KYC details and investment proofs. Here is what you will typically need:

• PAN or any one of the Officially Valid Documents (Aadhaar, Passport, Driving License, Voter ID Card, Letter issued by National Population Register, NREGA Job Card)
• Mutual fund statement: A consolidated account statement or folio details
• Bank details: Cancelled cheque or bank statement for loan disbursal
• Power of Attorney (POA): May be required to enable the pledge transaction 

If you hold mutual funds in demat form, your depository participant (DP) will process the pledge. For physical or non-demat holdings, it’s managed through the Registrar and Transfer Agent (RTA).

Wondering how to pledge mutual fund investments? The process is completely digital and can be completed in just a few steps. Here is how it works:

1. Choose the lender: Select a financial institution that offers loans against mutual funds.
2. Check eligible schemes: Verify if your mutual funds are on the lender’s approved list.
3. Submit your details: Provide folio numbers and mutual fund details.
4. Create a pledge request: The lender initiates a digital pledge on the depository platform (NSDL or CDSL).
5. Approve the pledge: You’ll receive an OTP-based approval request on your registered mobile or email.
6. Loan disbursal: Once approved, the lender disburses the loan amount directly to your bank account.

The entire process is paperless, fast, and usually takes less than 24 hours once verification is complete.

The Loan-to-Value (LTV) ratio determines how much loan you can get against your pledged funds. Here is what you can generally expect:

• Equity mutual funds: Up to 50% of the fund’s current NAV
• Debt mutual funds: Up to 90% of the NAV
• Hybrid funds: Around 60% of the NAV

The LTV is recalculated regularly to reflect market changes. If the fund’s value drops significantly, the lender may ask you to top up your collateral or repay part of the loan, a process known as a margin call.

While pledging mutual funds is cost-effective, it is essential to be aware of the associated charges.

There are typically no hidden charges if you read the agreement carefully. Always confirm fees with the lender before pledging your funds.

While a loan against mutual funds is a convenient option, it does carry some risks. Key factors to consider include:

• Market volatility: A fall in NAV may trigger a margin call.
• Collateral lock-in: You cannot redeem pledged funds until the loan is repaid.
• Interest obligations: You must pay interest regularly, even if markets perform poorly.
• Possible liquidation: If you fail to meet margin calls, the lender can sell pledged units.
• Limited eligibility: Not all schemes are accepted for pledging.

Despite these risks, pledging remains safer than liquidating long-term holdings during short-term cash needs.

Before proceeding, review a few important points to ensure a smooth experience:

• Assess your repayment capacity: Borrow only what you can comfortably repay.
• Understand LTV fluctuations: Be prepared for margin calls in volatile markets.
• Compare lenders: Look for competitive rates and transparent terms.
• Monitor your fund’s performance: Keep track of NAV and market trends.
• Review the pledge agreement: Understand all charges and foreclosure terms.
• Keep repayment records: Maintain a track of interest payments to avoid penalties.

Stay in control of your investments and finances. Leverage securities smartly to access funds with confidence.

Pledging your mutual funds is one of the most efficient ways to raise funds without disturbing your investments. You continue to enjoy the benefits of your portfolio while getting the liquidity you need. Whether it is for a short-term financial requirement, emergency expenses, or a business opportunity, a loan against mutual funds can help you make the most of your assets quickly, securely, and efficiently.

Unlock the potential of your investments today. Apply for a loan against mutual funds and access instant liquidity when you need it most.