If you need quick access to cash without liquidating your investments, an Overdraft (OD) against Mutual Funds can be a smart solution.
It allows investors to borrow funds by pledging their mutual fund units as collateral — ensuring liquidity while maintaining investment continuity. Let’s break down what this facility means, its benefits, and how to apply for it.
What is an OD Against Mutual Funds?
An OD against Mutual Funds is a secured credit facility offered by banks and financial institutions.
Under this, you can pledge your mutual fund holdings (equity, debt, or hybrid schemes) to the bank in exchange for an overdraft limit — usually a percentage of your fund’s market value.
This means you can withdraw money up to your approved limit, pay interest only on the amount utilized, and continue earning returns on your mutual fund investments.
How It Works
You pledge your mutual fund units to a bank or NBFC through an online or offline process.
The lender assesses the Net Asset Value (NAV) of your holdings.
Based on the fund type and valuation, you get an approved overdraft limit — typically 50–70% of NAV for equity funds and up to 80–85% for debt funds.
The amount can be withdrawn, repaid, and reused like a revolving credit line.
The mutual fund units remain invested but are marked as ‘lien’ in favor of the lender until repayment.
Key Benefits of OD Against Mutual Funds
1. Liquidity Without Redemption
You don’t have to sell your investments. Your funds continue to grow, and you still earn dividends or capital appreciation during the tenure.
2. Pay Interest Only on Usage
Unlike personal loans, where interest applies on the full amount, here you pay interest only on the portion you actually use.
3. Flexible Repayment
There’s no fixed EMI. You can repay partially or fully anytime — offering greater control over cash flow.
4. Lower Interest Rates
Since the overdraft is backed by your mutual funds, the interest rate is typically lower than unsecured loans like personal loans or credit cards.
5. Quick and Paperless Process
Banks with tie-ups to mutual fund registrars (like CAMS or KFintech) can process your request digitally within hours.
6. Continued Investment Growth
Even though your units are pledged, they continue to earn returns. When you repay the overdraft, the lien is released, and your investment becomes fully accessible again.
Eligibility Criteria
Must be a resident Indian investor holding mutual fund units in your name.
Only listed or approved mutual funds are accepted by lenders.
You should have an active bank account with the lending institution.
Minimum fund value and documentation requirements may vary between banks.
Documents Required
Valid ID proof (PAN, Aadhaar, or Passport)
Mutual fund statement or folio details
Bank account and KYC verification
Income proof (for limit assessment, in some cases)
Step-by-Step Process to Avail OD Against Mutual Funds
Step 1: Application
Apply online or visit your bank branch. Choose “Loan or OD against Mutual Funds” under secured credit options.
Step 2: Mutual Fund Pledge
Authorize the bank to place a lien on your mutual fund units through CAMS or KFintech’s digital interface.
Step 3: Limit Sanction
The lender evaluates the fund type and NAV to sanction an overdraft limit.
Step 4: Account Activation
An OD account is created, linked to your bank account. You can now withdraw funds up to your approved limit anytime.
Step 5: Interest and Repayment
Interest is charged daily on the utilized balance. You can repay anytime to reduce interest costs.
Step 6: Lien Release
Once the outstanding amount is fully paid, the bank releases the lien, and your mutual fund holdings become freely redeemable again.
Important Considerations
Market fluctuations can affect your OD limit since mutual fund values change daily.
If fund values fall sharply, you may be asked to top up your security or partially repay the overdraft.
Not all mutual funds are eligible — sectoral or small-cap funds may be excluded due to volatility.
Always check processing fees and prepayment conditions before applying.
Example
If you have mutual fund investments worth ₹10 lakh and the bank offers 70% of it as an overdraft limit, you can access ₹7 lakh as revolving credit.
If you use ₹2 lakh for 30 days at a 10% interest rate, your interest payable is approximately ₹1,643 — not on ₹7 lakh, but only on what you used.
Who Should Opt for This Facility
An OD against mutual funds is ideal for:
Investors needing short-term liquidity for business or personal use.
Those who don’t want to redeem long-term investments prematurely.
Individuals looking for flexible borrowing at lower interest rates.
Conclusion
An OD against Mutual Funds offers the best of both worlds — liquidity and investment continuity. It’s a smart financing option for those seeking short-term credit without disturbing their long-term wealth creation goals.
However, borrowers should monitor their fund values and repayment discipline closely, as market movements can influence their borrowing limit.
Used wisely, this facility can help you stay financially flexible without breaking your investments.
FAQs
Q1. What is the full form of OD in banking?
A: OD stands for Overdraft, a facility allowing you to withdraw more money than what’s available in your account up to a sanctioned limit.
Q2. Can I get an OD against SIPs?
A: Yes, if your SIPs have accumulated a sufficient balance in mutual fund units, you can pledge those units for an OD.
Q3. Is OD against mutual funds better than a personal loan?
A: Yes, because it offers lower interest rates, flexible repayment, and you retain your investment benefits.
Q4. How is interest calculated on OD?
A: Interest is charged only on the utilized amount and for the number of days it is used.
Q5. What happens if mutual fund values drop?
A: The bank may ask you to repay part of the overdraft or pledge additional units to maintain margin requirements.
Published on : 12th November
Published by : SMITA
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