If you have taken or are considering a loan against mutual funds, you will come across the term lien marking. It sounds complicated, but the concept is quite simple.
This post explains what a lien is, how it works on mutual fund units, and what it means for you as an investor.
What is a Lien?
A lien is a legal claim or hold placed on an asset by a lender. It gives the lender the right to the asset if the borrower fails to repay the loan.
In the context of mutual funds, a lien is a temporary restriction placed on your mutual fund units. When a lien is marked on your units:
- You continue to own the units
- The units remain invested in the same scheme
- You continue to earn returns (NAV appreciation, dividends)
- But you cannot sell, redeem, or switch those units until the lien is removed
Think of it like a car loan — you own the car and drive it every day, but the bank holds the registration until you finish paying. With mutual fund lien marking, you own the units and they keep growing, but you cannot move them until the lien is lifted.
When is a Lien Marked?
A lien is marked on mutual fund units in these situations:
1. Loan Against Mutual Funds
This is the most common reason. When you take a loan against your mutual fund holdings, the lender marks a lien on the units you pledge as collateral. This protects the lender — if you do not repay, they can invoke the lien and redeem those units to recover the loan.
2. Margin Trading Facility
Stockbrokers may mark a lien on your mutual fund units when they are used as collateral for margin trading in the stock market.
3. Guarantee or Security
In some cases, mutual fund units may be pledged as security for other financial obligations, and a lien is marked accordingly.
How Does Lien Marking Work?
The process is straightforward and largely digital:
- You agree to pledge — You select which mutual fund units you want to pledge and authorise the lien marking
- Lender sends a request — The lender (or the lending platform) sends a lien marking request to the RTA (Registrar and Transfer Agent — either CAMS or KFintech)
- RTA marks the lien — The RTA records the lien against your specific units in their system. This is reflected in your mutual fund account statement
- Loan is disbursed — Once the lien is confirmed, the lender disburses the loan
- Lien is removed on repayment — When you repay the loan in full, the lender requests the RTA to remove the lien. Your units are free again
The entire process typically happens within the same day, and in many cases, within minutes through digital platforms.
What Can You Do with Lien-Marked Units?
| Action | Allowed? |
|---|---|
| Continue to own the units | Yes |
| Earn returns (NAV growth) | Yes |
| Receive dividends (if any) | Depends on the lender’s terms |
| Sell / Redeem | No — not until lien is removed |
| Switch to another scheme | No |
| Add more SIP to the same scheme | Yes (new units are separate) |
| Pledge additional units | Yes (subject to lender’s terms) |
The key point is that your investment continues to work for you. The lien only restricts your ability to move or sell those specific units.
Partial Lien and Full Lien
Depending on the loan amount and your portfolio, the lien may be:
- Full lien — All units in a particular folio or scheme are marked
- Partial lien — Only a specific number of units are marked
For example, if you hold 1,000 units of a fund worth ₹10,00,000 and you need a loan of ₹4,00,000, the lender may mark a lien on only 500-600 units (depending on the LTV ratio). The remaining units are free for you to redeem or switch as you wish.
What Happens if You Default?
If you fail to repay the loan:
- The lender will first try to contact you and ask for repayment
- If you still do not pay, the lender can invoke the lien — this means they instruct the RTA to redeem the lien-marked units
- The redemption proceeds are used to recover the outstanding loan amount
- Any surplus after loan recovery is returned to you
This is the lender’s safety mechanism. It is why loans against mutual funds have lower interest rates than unsecured loans — the lender has a clear, liquid collateral that can be easily converted to cash.
Does Lien Marking Affect Your NAV or Returns?
No. Lien marking has absolutely no impact on:
- The fund’s NAV
- Your returns
- The fund manager’s investment decisions
- Your ownership of the units
It is purely an administrative hold at the RTA level. The fund continues to operate as normal, and your units participate fully in whatever the fund earns or loses.
How to Check if You Have a Lien on Your Units
You can check lien status through:
- Consolidated Account Statement (CAS) — The monthly CAS from CAMS or KFintech will show lien details against your holdings
- MFCentral — The MFCentral portal allows you to view lien status across all your mutual fund investments
- AMC website/app — Some AMCs show lien details when you log in to your account
- Lending platform — The platform through which you took the loan will show which units are pledged
Common Questions
Can I take a loan against units that already have a lien?
No. Units that are already lien-marked cannot be pledged again for a second loan. You would need to either use different units or get the existing lien removed first.
Can I do a SIP in the same scheme where some units are lien-marked?
Yes. New SIP investments create new units, which are separate from the lien-marked units. The new units are free to redeem or switch.
What if the NAV of my lien-marked units drops significantly?
If the value of your collateral drops below the lender’s required threshold, you may receive a margin call — a request to either pledge more units or repay part of the loan. This is important to be aware of, especially with equity fund pledges.
How long does it take to remove a lien?
Once you repay the loan, lien removal typically takes 1-3 business days. Some digital platforms can process it faster.
Key Takeaways
- A lien is a temporary hold on your mutual fund units, placed when you use them as loan collateral
- Your units remain invested and continue to earn returns — the lien only restricts selling or switching
- The lien is marked and removed through the RTA (CAMS or KFintech)
- The process is digital and typically completes within hours to a day
- If you default, the lender can redeem the lien-marked units to recover the loan
- Lien marking does not affect your NAV, returns, or ownership in any way
Lien marking is a simple, transparent mechanism that makes loans against mutual funds possible. It protects the lender while allowing you to keep your investments growing. Understanding how it works helps you use this financial tool with confidence.
