Back
How Mutual Fund House Policies Influence Loan Against Mutual Funds
What Role Do Mutual Fund Houses Play in LAMF?
Mutual fund houses (AMCs) play a key role in Loan Against Mutual Funds (LAMF) because they define the rules governing how their schemes can be pledged. While lenders provide the loan, the ability to pledge units depends on the policies set by the fund house and operational processes handled by RTAs like CAMS and KFintech.
Eligible and Ineligible Funds
Not all mutual fund schemes are eligible for LAMF. Fund houses may restrict certain categories such as close-ended funds, ELSS (due to lock-in periods), or funds under specific operational conditions. Lenders also maintain their own approved list based on these policies.
Impact on Loan-to-Value (LTV)
The type of fund approved by the AMC directly affects the LTV ratio. Equity funds generally have lower LTV due to higher volatility, while debt funds allow higher LTV. These limits are influenced by both lender policies and fund characteristics defined by the AMC.
Lien Marking and Operational Rules
Mutual fund houses enable lien marking through RTAs. The process, timelines, and restrictions are governed by AMC policies. For example, certain funds may have specific rules on partial pledging or redemption while under lien.
Restrictions on Transactions
Once units are pledged, fund house rules may restrict redemption, switching, or other transactions. These restrictions ensure that the lender’s collateral remains intact until the loan is repaid.
Corporate Actions and Dividends
Fund house policies also determine how dividends or other corporate actions are handled when units are under lien. In most cases, dividends may still be credited, but this depends on the scheme and lender arrangement.
Impact of Scheme Changes
If a mutual fund scheme undergoes changes such as mergers or reclassification, it may impact your pledged units and LAMF structure. Lenders and RTAs coordinate with AMCs to manage such scenarios.
Why It Matters for Borrowers
Understanding fund house policies helps you choose the right schemes to pledge and avoid operational issues. It ensures smoother processing and better management of your loan.
Final Thought
Mutual fund house policies are a critical but often overlooked factor in LAMF. Being aware of these rules helps you optimize your borrowing experience and avoid unexpected limitations.
Loan Against Mutual Fund is subject to applicable interest rates and credit assessment. Mutual fund units pledged as collateral are subject to market risks. Please read all loan-related documents carefully.
