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Most of us have faced situations where an urgent need for money arises without warning. In such moments, our long-term investments often become the first thing we think about redeeming. But what if there was a way to access money instantly without selling your investments or disturbing your long-term goals? This is exactly where the option of pledging mutual funds can help.
Today, unlocking liquidity has become much easier. Investors can pledge mutual funds just like shares, use them as collateral and avail loans or trading margins while still staying invested. With modern investing platforms, the entire process right from pledging to approval, has become quick, transparent and seamless.
In this article, we will explain how to pledge mutual funds, eligibility criteria, the step-by-step process, documentation required and the key risks every investor should be aware of.
What Is Mutual Fund Pledging?
Mutual fund pledging means using your mutual fund units as collateral to get a loan or trading margin without selling your investments. When you pledge mutual funds, the lender places a lien on your units. This means the units stay in your demat account, remain in your name and continue to grow in value but you cannot redeem them until the loan is repaid and the lien is removed.
It is commonly used when investors need quick liquidity but do not want to disturb their long-term investments.
Example
Suppose you have 200 units of a mutual fund and NAV is ₹50.
- Total value = 200 × ₹50 = ₹10,000
- If the lender applies a 10% haircut, they reduce ₹1,000 for safety
- So, the pledgeable value = ₹9,000
This means you can get a loan or margin benefit of ₹9,000 without selling your mutual funds.
Eligibility Criteria for Mutual Fund Pledging
- Mutual fund units must be held in demat form, as SOA (Statement of Account) units cannot be pledged.
- You can pledge mutual funds only if the scheme is approved for pledging by the broker or exchange.
- There is no minimum investment requirement, but the units must be fully settled in your demat account before pledging.
- Fractional units cannot be pledged, only complete units are eligible for lien marking.
- For ELSS mutual funds, only free, non–locked-in units can be pledged.
- An active demat and trading account with the broker is required for mutual fund pledging.
- Eligibility lists, margin availability and scheme-wise approval may change, so investors should check the updated list provided by their broker.
How to Pledge Mutual Funds Step-by-Step
Here is a step-by-step process most brokers follow when you pledge mutual funds:
- Step 1: Open a demat account and hold your mutual funds in demat form
To pledge mutual funds, your units must be in a demat account. Once the account is active, you can buy mutual fund units and wait for them to settle before pledging.
- Step 2: Go to the pledging or collateral section
Most platforms have a dedicated “Pledge” or “Collateral” option. Here, you can check which of your mutual fund holdings are eligible for pledging.
- Step 3: Select the mutual fund units you want to pledge
Choose the eligible schemes you want to use as collateral. Platforms usually display the NAV, haircut and loan-to-value (LTV) ratio, so you know how much margin or loan you can get.
- Step 4: Apply for a loan or margin against your pledged funds
Enter the amount you want to borrow or the margin you need. The platform calculates the available limit based on your units and the applicable haircut.
- Step 5: Complete the documentation
Most brokers use digital KYC and e-sign, so documents are submitted online without manual paperwork.
- Step 6: Lien marking and disbursement
Once the pledge request is approved by the registrar and depository, your units are lien-marked and cannot be redeemed. The loan amount or margin benefit is then credited to your bank or trading account, usually within the same day, depending on processing time.
- No need to redeem your investments: You stay invested and continue to benefit from market growth while availing a loan or margin facility.
- Quick and digital process: Most brokers now offer fully online pledging, making approval and lien marking faster and hassle-free.
- Transparency in valuation: Investors can see the NAV, haircut and eligible loan amount clearly before pledging their mutual fund units.
- Flexible usage: Pledged value can be used for trading margins or as a short-term loan against mutual funds, depending on your needs.
- Blocked redemption: Once units are pledged, they cannot be sold or switched until the lien is removed.
- Interest costs: Loans against mutual funds attract interest, which can reduce your overall returns if the loan is not managed properly.
- Margin calls: If NAV of your pledged mutual fund drops sharply, the lender may ask for additional collateral or partial repayment.
- Forced sale risk: If you fail to repay the loan or maintain the required margin, the lender has the right to sell the pledged units to recover dues.
Final Words
Pledging mutual funds is a smart way to access liquidity without selling your investments or disrupting long-term financial goals. By using your mutual fund units as collateral, you get the benefit of a loan or trading margin while your investments continue to grow in value.
With demat mutual funds and digital processes becoming common, pledging has become easier, faster and more transparent for investors. If you already hold mutual funds in demat form and need collateral-backed funding, pledging can be a convenient way to improve your financial flexibility while keeping your wealth invested.
FAQs on Pledging Mutual Funds
Do I lose ownership of my mutual fund units after pledging?
No. The units remain yours. They are simply locked for redemption until the loan is repaid and the lien is removed.
Can I pledge all my mutual fund investments?
You can pledge only those mutual fund units that are held in demat form and are part of the eligibility list provided by your broker or platform.
How long does the pledging process take?
Most brokers complete lien marking and approval within a few hours or within the same business day, depending on the time of request and platform processing speed.
What happens if the mutual fund NAV drops during the loan period?
If the NAV falls, the lender may ask for a margin top-up or partial repayment to maintain the required collateral value. This helps prevent forced liquidation of your units.
Is pledging mutual funds safe?
Pledging mutual funds is safe because units remain in your demat account. The main risks are NAV fluctuations and interest costs, so borrow only what you can comfortably repay.
Which mutual funds cannot be pledged?
Mutual funds held in SOA format, fractional units, locked-in ELSS units and schemes not approved by the broker or exchange cannot be pledged. Only demat units listed as eligible qualify.
Is pledging mutual funds better than taking a personal loan?
Pledging mutual funds offers lower interest rates, quick approval and allows investments to stay intact. However, it carries margin-call risks if NAV drops, unlike fixed-EMI personal loans.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
