Smart things to know about pledging your MF units

Here are a few smart things to know about MFs:

Mutual fund investors can pledge their mutual fund units as collateral to borrow money from scheduled banks, financial institutions or NBFCs.

The lender will create a lien or charge on the basis of units pledged with them. If the investor fails to pay the loan amount, the lender can sell the units and recover their dues.

The loan amount will depend on the margins charged by lenders, as percentage of the value of units under lien.

Dividends and other benefits from the units under lien will go to the unit holder, unless they are specifically barred by the lien holder.

A unit holder cannot redeem the units under a lien until the lien holder provides a written authorisation to the fund to revoke the lien.

Once the investor repays the loan, the units become free from the lien and are unmarked.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)