Six smart things to know about loan against mutual fund investments

1. Banks and finance companies offer loans against investments such as shares, bonds and mutual funds.

2. The amount given as loan will be lower than the market value of the units held by the borrower. This is called the haircut or margin.

3. Liquid funds and debt funds have a lower margin; equity and balance funds have a higher margin.

4. The rate of interest depends on the tenor of the loan, the credit score of the borrower and the extent of margin charged.

5. The units will be marked as under lien in the books of the mutual fund. The investor cannot sell or redeem the units until the loan is repaid.

6. If the borrower defaults, the lender can evoke the lien and recover the dues. Interest rates are lower on loan against assets due to this security.



(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)