1.Banks and non-banking financial companies provide loans against mutual fund units. An application has to be filed by all joint holders of the mutual fund folio to seek such a loan.
2. Loans are provided at rates lower than those for unsecured personal loans. The lender will ask for a lien to be marked on the units, which will be lifted when the loan is repaid.
3. A lien is marked by the lender when he notifies the registrar or the asset management company. A lien can be marked on all or part of the units held in a folio.
4. The amount of loan that is sanctioned is a percentage of the value of units held in the folio on the date of giving the loan. In the case of equity funds, the margin can be higher (50%).
5. The dividends can continue to be paid to the holder of units even during the period of the lien. However, no units can be redeemed before the loan is repaid.
6. If there is a default on the loan, the lender can invoke the lien and ask for the units to be redeemed. The proceeds will be paid to the lender.
The content on this page is courtesy Centre for Investment Education and Learning (CIEL).
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