What is a Mutual Fund Pledge? Benefits, Process and Loan Details

Do you need urgent funds but do not want to sell your mutual fund investments? Many investors face this dilemma during emergencies or when sudden opportunities arise. Instead of redeeming your funds, which may disturb your long-term financial plans, you can simply pledge them to access liquidity. By pledging your mutual funds, you can avail of a loan quickly without losing out on potential returns. It is one of the simplest and most efficient ways to unlock the value of your investments while they continue to grow.

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What is mutual fund pledging?

Mutual fund pledging is the process of offering your mutual fund units as collateral to a bank or NBFC in exchange for a loan. Your mutual fund units remain invested, but the lender marks them as pledged until you repay the loan. This facility helps you access funds quickly without liquidating your portfolio, making it an ideal choice for urgent cash needs.

Meaning of pledging mutual funds for a loan

Here is what pledging mutual funds essentially means:

• You use your mutual fund units as security for borrowing.
• The units remain in your name and continue to earn returns.
• The lender places a lien (legal claim) on your pledged units.
• Once you repay, the lien is removed, and units are released.

Key aspects of mutual fund pledging

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How does mutual fund pledging work?

The pledging process is simple and mostly online today. Here’s how it works step by step:

1. Loan application – You apply for a loan with a lender offering LAS (Loan Against Securities).
2. Select funds – Choose the mutual fund schemes you want to pledge.
3. Pledge creation – The lender requests that the mutual fund transfer agencies (MFCentral, CAMs, and KFIN) to mark your units as pledged.
4. Verification – The depository confirms and marks a lien on selected units.
5. Loan disbursal – The lender disburses the eligible loan amount directly to your bank account.
6. Repayment – You repay in instalments or as per agreed terms.
7. Release of lien – Once fully repaid, the pledge is removed and units are unblocked.

Benefits of pledging mutual funds instead of redeeming

Pledging your mutual funds offers several unique benefits:

• Quick liquidity – Funds are disbursed within a short time.
• No redemption pressure – Investments remain intact and continue compounding.
• Lower interest rates – As a secured loan, rates are lower than personal loans.
• Flexible usage – Funds can be used for business, education, or emergencies.
• Maintain portfolio strategy – Long-term goals remain unaffected.

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Mutual fund pledge eligibility criteria

Eligibility is simple and open to most investors.

• Age: 18 to 90 years
• Residency: Indian residents 
• Employment: Salaried or self-employed
• Investments: Mutual fund units held in a demat account
• Minimum Value: Minimum portfolio value of Rs. 50,000
• Income: Proof of repayment capacity may be required

Mutual fund types eligible for pledging

Not all mutual funds are accepted for pledging. Generally, the following are eligible:

• Equity mutual funds
• Debt mutual funds
• Hybrid funds
• Liquid funds
• Index funds

Lenders usually ask for:

•  PAN, any one of the officially valid documents:  Aadhaar, Voter ID Card, Passport, Driving License, NREGA Job Card, Letter issued by the National Population Register
• In case current address is not available on OVD, any one of the deemed to be officially valid document: Utility bill, Property or Municipal tax receipt, Pension or Family Pension Payment Orders (PPOs), Letter of Allotment of Accommodation from Employer issued by State Government or Central Government Departments, Statutory or Regulatory Bodies, Public Sector Undertakings, Scheduled Commercial Banks, Financial Institutions and Listed Companies, and Leave & License Agreements with such employers allotting official accommodation
•  Income proof (Salary slips, ITR, or bank statements if required)
• Mutual fund statement / Demat account details
• One recent photograph

Process to pledge mutual funds online

Pledging online is convenient and quick.

Step 1: Click on the Apply button.

Step 2: Fill in your personal details such as name, PAN, and date of birth.

Step 3: Enter your email ID and complete verification.

Step 4: Provide your mobile number so that your portfolio can be fetched securely through CAMS and KFintech systems.

Step 5: Choose the mutual funds from your portfolio and specify the units to be marked under lien to generate a loan offer.

Step 6: A loan offer is created based on your eligibility. You can either proceed with it or make changes.

Step 7: Confirm lien marking by entering the OTP sent to your registered mobile number.

Step 8: Complete KYC and bank account verification to generate your sanction letter.

Step 9: Review and accept the agreement, then provide consent for loan sanction and disbursement.

Step 10: Once verification is done, the approved loan amount will be credited directly to your bank account.

How much loan can you get against mutual funds?

The loan amount depends on the value of your pledged funds and the lender’s LTV (Loan-to-Value ratio).

• Example 1: If your mutual funds are worth Rs. 10 lakh and LTV is 90%, you can get Rs. 9 lakh.
• Example 2: For Rs. 25 lakh worth of funds, with 55% LTV, you can get Rs. 13.75 lakh.

Interest rates and charges for the mutual fund loan

Interest rates are competitive compared to unsecured loans.

Loan against mutual funds vs Loan against shares

Risks and considerations before pledging mutual funds

While pledging offers liquidity, keep these factors in mind:

• Market risk: NAV fluctuations may reduce loan eligibility.
• Margin calls: If fund value drops, you may need to pledge more units.
• Usage discipline: Use borrowed funds wisely to avoid a debt burden.
• Repayment obligation: Regular EMIs or bullet payments must be made.

Conclusion

Pledging mutual funds is a practical way to access liquidity without breaking your investments. You get to meet urgent needs while your portfolio continues compounding. With competitive interest rates and flexible repayment, it is a smarter alternative to redeeming your funds.

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