Can Mutual Funds be Pledged as Collateral?

Pledging mutual funds is a process where an investor uses their existing mutual fund units as collateral to obtain a loan from a financial institution, such as a bank or a non-banking financial company (NBFC). It is a way to unlock the value of your mutual fund investments without having to redeem or sell them.

When you pledge your mutual funds, you essentially transfer the ownership rights of those units to the lender until you repay the loan amount, along with the applicable interest charges. However, during the pledge period, you continue to enjoy the benefits of the mutual fund scheme, including dividends, capital appreciation, and other rights associated with the units.

The lender holds a lien on your pledged mutual fund units, which means that if you fail to repay the loan, the lender has the right to redeem or sell those units to recover the outstanding amount. Once you have repaid the loan in full, the lien is removed, and you regain full ownership and control over your mutual fund units.