Lien Marking of Mutual Funds

What is lien marking?

Lien marking refers to the process where a claim or a legal right is placed on an asset to secure a loan or obligation.
Lien marking serves as a security measure for lenders while allowing borrowers to leverage their investments without liquidating them.
For example, if an investor wants to take a loan from a financial institution such as a bank or NBFC and has mutual fund units, shares, or bonds, the financial institution can mark a lien on these financial instruments. This means the bank or NBFC has a legal claim over the specified assets until the loan is fully repaid. The investor cannot sell or transfer the lien-marked mutual fund units, shares, or bonds until the lien is removed, usually after the loan is paid off.

Let's consider a practical scenario involving mutual funds:

Suppose an investor needs a loan and offers their mutual fund investments as collateral. The financial institution will proceed to mark a lien on the mutual fund units equivalent to the loan amount or as required by the bank's policy. This lien marking is registered with the mutual fund's registrar and transfer agent (RTA). While the lien is in place, the investor continues to own the mutual fund units and earn dividends or capital gains, if any, but cannot redeem or transfer the units. Once the loan is repaid, the lender requests the removal of the lien, allowing the investor to operate their mutual fund units again freely.

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