Mutual Fund value changes daily and the maximum loan amount is linked to this value. A correction in the markets can result in a loan amount exceeding the limit.
In such a case, the lender will require part prepayment of the excess loan within 7 days or a pledge of additional mutual fund units. This is known as a margin call.
For example:
You took a loan worth ₹35,000 by pledging mutual fund worth ₹1,00,000.
In current NAV of your pledged mutual funds falls by 40% to ₹60,000. Then your new loan margin will be ₹30,000.
In such case, the lender will do a margin call where you'd either have to pledge additional mutual fund units or deposit back ₹5,000 into your loan account.
We have built-in a buffer of 15% to reduce the chance of a margin call. And as a prudent practise, we encourage maintaining some liquidity in your linked bank account at all times.
