Don’t Redeem, Lien Mark (Loan Against Mutual Funds) - Network FP
December 7, 2021

Don’t Redeem, Lien Mark (Loan Against Mutual Funds)

C.R. Chandrashekhar
Founder & CEO, DhanLAP

Scenario 1:

Ritu Sharma is a 30-year-old working woman from Gurgaon, earning a decent salary, and taking care of her parents. She has a new apartment, and she is servicing her home loan. She has invested in a post office time deposit scheme, Gold, and mutual funds. Her mutual fund investments provide an average annual return of 16% per annum. Ritu was pleased about her returns and her investment performance. Ritu’s mother needs to undergo an emergency bypass surgery for which she needs Rs.10,00,000, and Ritu does not have sufficient liquid cash. She has investments across post office time deposits and mutual funds amounting to Rs.40,000,00, out of which she has invested Rs.25,00,000 in Mutual Funds. She approaches Manish Malhotra, her neighbor who is a Registered Investment Advisor, to help her redeem her Mutual Funds to cover her mother’s medical expenses.

Scenario 2:

Mahesh Narayanan, a 40-year-old married male from Bangalore, living with his wife Anupama, 37 years old, and kids Sanjay 8-year-old son and Kavitha 6-year-old daughter. Mahesh runs his consultancy firm and earns well to lead a happy life. Mahesh has invested in Gold, Long-term FD’s, term insurance & mutual funds. His portfolio value is around Rs. 1,20,000,00. He has a mutual fund portfolio of Rs. 60,000,00. Mahesh has planned to sell his existing apartment and buy a bigger apartment to live a comfortable life. He has a bonus income coming his way in 6 months. He found a new house which he liked, and he needs to pay Rs. 25,000,00 as the advance amount and to remain he will serve through a home loan. He planned to redeem his Mutual Fund portfolio and approached Chetan Sharma, a mutual fund distributor from Bangalore, to help him to redeem the right Mutual Funds.

Unplanned need-based short or midterm financial requirements arise for every individual. In the above scenarios, Ritu needs money for her emergency expenses, and Mahesh decides to move to a bigger apartment by selling his apartment, which is need-based but not planned. Both have a decent income and can save this amount over a period of time easily.

In the first scenario, Manish analyzed the portfolio of Ritu and understood that the portfolio has 100% exposure to equity funds, and if redeemed, Ritu will have the impact of both exit load and Long-Term Capital Gains. But since her portfolio is providing decent returns, Manish is advising her to go for a Loan against Mutual funds (LAMF), which will help her to keep her portfolio intact, which is providing an average annual return of 16% and overcoming both the exit load and LTCG issues.

The returns provided by her portfolio will be more than her loan interest servicing part. Mahesh started to rework Ritu’s portfolio based on her needs and devised a time-bound Financial Plan and, along with that, has also planned emergency funds using LAMF. Once Ritu is done with her mother’s surgery, she will implement the Financial Plan provided by Manish.

Not only does LAMF provides money when they need it immediately, but it also provides flexibility for the clients to pay as they use it. This feature helps the clients to lien mark (lien mark means, an investor grants permission to banks or NBFCs the right to sell or hold the units in case of default in repayment of the loan and/or for margin purposes. One can always continue to benefit from the dividends and notional returns earned on the mutual fund units that he/she has pledged) portfolio for their emergency needs and use as much as needed and will be charged on the amount that is used. Clients can also pre-close the loan without any pre-closure charges. Clients will not have LTCG or exit load issues that they face when they redeem. They do not have to wait for 2-3 days for the amount to reach their bank account.

In the second scenario, Chetan advised Mahesh to lien mark Rs. 50 lakhs of his portfolio to get a Rs 25 lakh loan. As Mahesh is expecting a bonus shortly, he can prepay part of this loan when he receives the bonus income. Mahesh earns a good income, and he can pay the EMI over a period of time for the rest of the loan. This will make his Rs. 60 lakhs portfolio grow over the period of the loan, instead of redeeming it and saving for it all over again. Chetan also advised the rest of Mahesh’s portfolio of Rs. 10 lakhs to be lien marked so that it can be used in a time of emergency. Mahesh used the LAMF to lien mark his entire portfolio of Rs. 60 lakhs and took a loan payment of Rs. 25 lakhs. Mahesh has to pay interest only for the amount he took out – Rs. 25 lakhs. He can prepay it, partially or fully, as soon as he gets money from his business. Chetan solved Mahesh’s immediate issue, planned a way for future emergency purposes, and protected Mahesh’s long-term goals.

Margin and Interest rates:

Most banks and NBFCs usually offer LAMF up to 50% of the NAV in the case of equity mutual funds, and up to 80% of the NAV in the case of debt mutual funds. Margin always varies from lender to lender. A small processing fee is charged as well while disbursing the loan. Interest rates charged are generally in the range of 10% to 12%. Banks offer LAMF as an overdraft facility and one can use amounts up to the sanctioned limit.

In a nutshell, LAMF provides immense leveraging for clients. Existing portfolios can be leveraged for their short and mid-term needs without disturbing their goals and portfolio returns. Clients will overcome exit load and LTCG issues too. The client does not have to wait for funds. It can be accessed immediately. They need not open a new bank account or Demat account.

You can lien mark this emergency portfolio of funds in advance so that the money is available at any point in time. LAMF for all mutual fund schemes and to any individual bank account is provided seamlessly and digitally by DhanLAP To reiterate the principle behind the platform,

  • Do not redeem, lien mark – Get money for your short to mid-term needs without sacrificing your portfolio and goals. Pay it back using EMI or Balloon payments.
  • Pay for what you use – Lien, mark your portfolio, use the money as needed, and pay only for the amount used.

Go through the DhanLAP website here


3 Thoughts to “Don’t Redeem, Lien Mark (Loan Against Mutual Funds)”

  1. with due respect , i m not agree with this. we have health insurance & super top up policy. we can use it first. if 1crore health cover is finish thn we will think to redeem money from FD’s and debt funds.

    as a mfd and investor not preferred loan. its double loss for investor

    i would only suggest or take loan if market is down 40% and i need emergency money .

    • Chandra says:

      Thank you for your valuable comment. We are not suggesting that you should take a loan. We are giving an option to the advisors (and to their clients) for not redeeming their assets for short to mid term needs. The biggest problem in the investment space is redemption and hence the effect on long-term investment goals. LAMF is an option to overcome that.

  2. SUJATHA ANANTHARAMAN says:

    A very useful and important aspect covered. Very well articulated. This can be more extensively used.

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