A Mutual Fund investor can get a loan against his existing units. An investor can pledge his Mutual Fund units as a security to lenders such as banks and non-banking financial companies to borrow money against the existing units.
To borrow the money, a lien has to be marked against the the units. Lien refers to the right of the lender to take and hold or sell the property of a debtor as security or payment for a debt. A lien can be marked on all or part of the units held in a folio. A loan or an overdraft facility can be availed by the unitholder by approaching the lender.
Lets understand the process of marking a lien on Mutual Fund units:
The unitholder has to write a letter to the Mutual Fund house or the registrar; stating the name of the investor as per the Mutual Fund records, the folio number, the scheme and the number of units for which lien is to be marked requesting to mark a lien on the Mutual Fund units in favor of the lender. The units holder has to sign as per the mode of holding depending on whether the holding is single, joint or anyone or survivor. The letter also has to be be accompanied by the verification letter by the lender confirming all the details. If the investor is a non-individual, then the partnership deed/ board resolution should be submitted with the authorised signatory/ signatories authorising the pledging of Mutual Fund units.
An important point to be noted is that the lien is marked on units and not on the amount. Also, no units can be redeemed unless the loan is repaid.
The registrar after verification will mark the lien and send the letter to the lender with the copy to the investor.
The lender, after receiving the payments can ask the fund house to remove the lien on those units. The same is applied in case of partial payments also.
If the borrower defaults on the loan, the same lien can be enforced. In this case, the lender sends a letter to the Mutual Fund requesting to redeem all the units and send the proceeds to him.