What is OD Against Mutual Funds? Meaning, Benefits & Process

Need urgent funds but don’t want to sell your investments? Overdraft (OD) Against Mutual Funds offers a smart alternative! It allows you to borrow money by pledging your mutual fund units instead of liquidating them. You get a flexible credit line, pay interest only on what you use, and your investments continue to grow. It’s a smart way to access funds while keeping your wealth intact. 

Let us understand in detail about Overdraft (OD) Against Mutual Funds, how it works, its benefits, and why it can be a smart financing option. 

What is Overdraft (OD) Against Mutual Funds?  

Overdraft (OD) against Mutual Funds is a credit-based facility that a financial institution offers to their account holders. The individual can withdraw money even if their account balance has bottomed out and gone below zero. This is an extension of the monetary limit offered by banks. The credit limit is decided based on the type of mutual funds pledged and the customer’s relationship with the bank.  

The customer pays interest only on the amount they use, not the entire credit limit. Repayments are flexible, allowing them to pay as much or as little as they can at any time. There are no fixed EMI obligations, giving them complete control over their repayment schedule. Additionally, the interest is calculated dynamically based on the utilized amount.  

Basically, an Overdraft Facility functions as a short-term loan that has to be repaid over a fixed tenure along with pre-decided interest. 

How Does an Overdraft (OD) Against Mutual Funds Work? 

An Overdraft (OD) against mutual funds allows you to borrow money by pledging your mutual fund units as collateral. Instead of selling your investments, you use them to secure a credit line. You get to withdraw funds as needed while continuing to earn returns on your mutual funds.  

Let us understand how Overdraft (OD) against Mutual Fund works: 

• Pledge Your Mutual Funds: You apply for an OD facility by pledging mutual fund units (equity or debt) with your bank or NBFC. 

• Get a Credit Limit: The lender sanctions a credit limit, usually 50-80% of the Net Asset Value (NAV) of the pledged funds. 

• Withdraw as Needed: You can withdraw any amount within the approved limit, as and when required. 

• Interest on Usage Only: Unlike a personal loan, interest is charged only on the amount withdrawn, not on the entire credit limit. 

• Flexible Repayments: You can repay any amount at any time, reducing interest costs, as there are no fixed EMIs. 

• Funds Stay Invested: Since the units remain in your name, they continue to generate returns, allowing you to grow your wealth while accessing liquidity. 

• No Prepayment Penalty: Most lenders allow early repayment without extra charges, making it a cost-effective borrowing option.  

Features and Benefits of Taking OD Against Mutual Funds

Features 

• Secured Credit Facility: The OD is backed by your mutual fund investments, making it a secured loan. The bank offers OD with a predetermined limit that will differ as per the borrower. 

• Loan Amount: You can get 50 – 80% of your mutual fund’s Net Asset Value (NAV) as an OD limit. 

• Interest on Usage Only: Interest is charged only on the amount withdrawn, not the entire sanctioned limit. 

• Flexible Withdrawals & Repayments: Withdraw funds as needed and repay anytime without strict EMI commitments. 

• Continue Earning Returns: Your mutual funds remain invested and continue earning returns. 

• Quick & Hassle-Free Processing: Minimal paperwork and faster approval process, with some lenders offering instant digital overdrafts.  

Benefits 

• Lower Interest Rates: Compared to personal loans, OD interest rates are generally lower (around 9% – 15% per annum). 

• No Fixed EMIs: Unlike traditional loans, there is no mandatory EMI structure; you can repay at your convenience. 

• Retain Ownership of Funds: Since the units are pledged, you continue to earn returns on your investments. 

• Ideal for Short-Term Liquidity Needs: Best suited for managing business expenses, emergencies, or short-term cash flow gaps. 

• No Prepayment Charges: Most lenders don’t charge penalties for early repayment, helping reduce interest costs. 

• Multi-Use Fund Access: You can use the funds for any purpose, including medical emergencies, education, or business needs. 

Also Read: Personal Loan vs. Loan Against PPF – Which One is Better?

Eligibility Criteria for Availing OD Against Mutual Funds  

Eligibility criteria for an overdraft vary by bank but typically include:  

• Age: The individual should be 21 years and above 

• Bank account: The person must have an account with a bank that offers an overdraft 

• Income: The Income requirement depends on the lender’s criteria 

• Credit score: Having a good CIBIL score, or creditworthiness, gives you an added advantage 

• Business: Criteria varies as per the lender 

Documents Required for OD Against Mutual Funds  

To apply for an Overdraft (OD) against mutual funds, the following documents are required: 

• KYC documents: Aadhar Card, PAN card 

• Mutual Fund Statement 

• Bank Statement  

• Income Proof (Income Tax Returns) 

• Pledge Form  

Interest Rates and Charges on OD Against Mutual Funds  

• Interest Rate: Typically, 8% to 15% per annum, depending on the lender, mutual fund type, and borrower profile. 

• Processing Fees: Usually, 0.5% to 2% of the sanctioned limit or a fixed amount. 

• Prepayment Charges: Generally nil or minimal, allowing flexible repayment. 

• Renewal Fees: Some lenders charge an annual renewal fee if the overdraft facility is extended. 

• Penal Interest: Additional interest may apply on overdue amounts if repayment terms are not met. 

• Other Charges: Documentation fees, stamp duty, or account maintenance fees may be applicable.   

How to Apply for an Overdraft Against Mutual Funds? 

• Select the Lender: Select a bank or NBFC offering an OD against mutual funds. 

• Check Eligibility: Ensure your mutual funds are eligible for pledging (equity or debt funds). 

• Apply Online or Offline: Fill out the application form either through the lender’s website or by visiting the branch. 

• Pledge Mutual Funds: Authorize the lender to mark a lien on your mutual fund units. 

• Get Credit Limit Approved: The lender will assess your fund’s Net Asset Value (NAV) and approve a credit limit (typically 50-80% of NAV). 

• Access Funds Anytime: Withdraw money as needed and pay interest only on the utilized amount.  

Most lenders provide a digital process for fast approval and easy access to funds. 

Conclusion  

An Overdraft (OD) Against Mutual Funds is a smart way to access funds without selling your investments. It provides a flexible credit line, interest is charged only on the amount used, and you can repay it at your convenience. This option helps you meet financial needs while allowing your mutual fund investments to continue growing. If you need quick liquidity without disrupting your portfolio, an OD against mutual funds can be a great solution.