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Loan Against Mutual Funds vs Personal Loan: Which Is Better?

Have you ever looked at your mutual fund portfolio after a large expense and thought, “Should I redeem my investments… or just take a personal loan?”

You’re not alone.

In fact, over 43% of retail investors in India redeem their equity mutual funds within just 2 years. And if you think about it, many of these investments were probably started for long-term goals in the first place.

So what changes?

It usually starts with one unexpected expense: a home renovation that shoots over budget, a medical bill, urgent business capital, or a major family decision that can't wait any longer. You check your savings account, realise it's not enough, and your eyes move to your mutual fund portfolio.

Then the questions start:

"What happens to my long-term compounding if I withdraw now?" "Do I really want another EMI at a high interest rate?" "Is there a smarter way to arrange funds without disturbing my investments completely?"

What many investors still don't realise is that there may be a third option sitting quietly inside their portfolio:
a Loan Against Mutual Funds

In this blog, we'll break down Loan Against Mutual Funds vs Personal Loans in a simple, practical way, so you can decide which option works better for your situation without compromising your long-term goals.

What Is a Loan Against Mutual Funds?

A loan against mutual funds is a secured loan where you pledge your existing units as collateral. The lender marks a lien through CAMS or KFintech. You retain ownership and your funds stay invested, but you cannot redeem or switch them while the loan is active.

It is structured as an overdraft facility: you get a sanctioned credit limit and draw from it as needed, paying interest only on what you use.

RBI-mandated Loan-to-Value (LTV) limits:

• Equity mutual funds: up to 50% of current NAV
• Debt mutual funds: up to 80% of current NAV

Read More: Everything you need to know about Loan Against Mutual Funds

What Is a Personal Loan?

A personal loan is unsecured. No collateral required. You borrow a lump sum based on your income, credit score, and repayment history, and repay in fixed EMIs over 1 to 7 years.

Because there is no collateral, lenders price in the credit risk. Your credit score is the single biggest factor in the rate you receive.

Loan Against Mutual Funds vs Personal Loan: Key Differences at a Glance

Interest Rates: How Much Will You Actually Pay?

This is where the two products diverge most. Personal loan rates depend entirely on your credit score:

A loan against mutual funds works differently. Because your units secure the loan, lenders price it at 9%–12% p.a. regardless of your credit history. The rate depends on the lender and the fund type pledged.

There is a second difference in how interest is charged:

• Personal loan: interest runs on the full disbursed amount from day one
• Loan against mutual funds: interest accrues only on what you actually draw

If your sanctioned limit is ₹5 lakh but you draw ₹3 lakh, you pay interest only on ₹3 lakh. For borrowers with phased or unpredictable needs, the actual cost is often lower than the headline rate suggests.

What This Means in Rupees: ₹5 Lakh Borrowed for 12 Months

Loan Against Mutual Funds vs Personal Loan: Eligibility

Loan Against Mutual Funds

Eligibility is based on your portfolio, not your credit history. Most lenders require:

• Eligible open-ended mutual fund units in your name
• KYC complete and updated
• Funds held in non-demat format with CAMS or KFintech
• Individual applicant (companies and HUFs follow a physical process)

Income proof is typically not required, making this product accessible to self-employed professionals and freelancers.

Personal Loan

Eligibility is built around your credit and income profile. Lenders typically look for:

• Credit score of 700 or above (750+ for competitive rates)
• Income proof: salary slips, bank statements, or ITR
• FOIR (Fixed Obligations to Income Ratio) under 50%
• Stable employment or business history

The weaker your credit profile or income documentation, the harder and more expensive a personal loan becomes.

Key Risks to Weigh Before Applying

Loan Against Mutual Funds

1. Margin calls are the primary risk.

If your pledged equity fund NAV falls sharply, as it did during market corrections in 2020, 2022, and early 2025, the collateral value can breach the permissible LTV threshold. The lender will then require you to:

• Pledge additional units, or
• Partially repay the loan, usually within 48 hours

If you cannot meet the call, the lender can liquidate your units at the prevailing NAV.

Read more about how margin calls work in loans against securities. This risk is much lower when pledging debt or stable hybrid funds.

2. Locked units: While the lien is active, you cannot redeem, switch, or rebalance your portfolio.

3. No forced repayment: The overdraft structure has no fixed EMI. Some borrowers pay only the monthly interest and let the principal sit, quietly stretching borrowing costs over months or years.

Personal Loan

The cost adds up quickly. On a ₹5 lakh loan at 20% over 3 years, total interest approaches ₹1.7 lakh.

Other risks to keep in mind:

• High EMIs on top of existing obligations can strain monthly cash flow
• A single missed payment can drop your credit score by 50–100 points, affecting future borrowing eligibility

Ask yourself these eight questions before applying for a personal loan.

Which One Should You Choose?

Choose a Loan Against Mutual Funds If:

• You hold eligible open-ended mutual funds worth ₹5 lakh or more
• Your need is short-term, ideally under 12 to 18 months, and you have a clear repayment source such as a bonus, receivable, or property sale
• You are self-employed or have limited income documentation
• You want to stay invested and avoid triggering capital gains tax
• Your pledged funds are in debt or stable hybrid categories, reducing margin call risk

Choose a Personal Loan If:

• You have no eligible mutual fund portfolio to pledge
• The amount you need exceeds your portfolio's LTV limit
• You are borrowing during a period of high equity market volatility
• You have a strong credit score (750+) and have been offered a rate below 12%
• You need a fixed repayment schedule over a tenure longer than 18 to 24 months

For most investors, the decision ultimately comes down to whether you need temporary liquidity or whether you actually want to exit your investments. If your requirement is short-term and you already hold an eligible mutual fund portfolio, borrowing against those investments may help you meet the expense without interrupting your long-term compounding. If you want to explore this option further, you can apply for a Loan Against Mutual Funds through Mirae Asset Financial Services.