Sometimes you need money urgently.
It could be a medical expense, a home renovation, a business opportunity, or even a temporary cash flow issue. In such situations, most people think of taking a personal loan. But if you already invest in mutual funds, there is another option that many investors overlook: a loan against them.
Both options can provide quick access to funds, but they work in very different ways. Understanding the key differences between a personal loan and an LAMF can help you decide which option may be more suitable for your needs.
What Is a Personal Loan?
A personal loan is one of the most common types of loans offered by banks and NBFCs. The biggest reason for its popularity is simple: you don’t need to pledge any assets. Banks give you a loan based on your income, credit score, and repayment history.
Key features of personal loans
- No collateral required
- Quick approval process
- Fixed EMIs every month
- Loan approval largely depends on your credit score and income profile
In India, personal loan interest rates usually range between 10% and 24% per year, depending on the borrower’s credit profile and the lender.
Someone with a high credit score may get a lower rate, while others may end up paying significantly more. Another important point is that missing EMI payments can affect your credit score. Since personal loans are unsecured, lenders monitor repayment closely, and delays can negatively impact your future borrowing ability.
What Is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) works differently.
Instead of redeeming your investments when you need money, you can pledge your mutual fund units as collateral and borrow against them.
Your investments remain in your portfolio. They are simply marked with a lien, which means you cannot sell them until the loan is repaid. This allows you to access funds without disturbing your long-term investments.
Key features of loans against mutual funds
- Mutual fund units are pledged as collateral
- Investments remain invested in the market
- Lower interest rates compared to personal loans
- Flexible repayment options in many cases
Because the loan is secured by your investments, lenders usually offer lower interest rates, often between 8% and 15% per year.
Also read: Everything You Need to Know About Loan Against Mutual Funds and Their Process
Personal Loan vs Loan Against Mutual Funds: A Quick Comparison
If you are trying to decide between the two, doing a LAMF vs personal loan comparison can make things much clearer. Both options provide access to funds, but they differ in terms of interest rates, eligibility, repayment structure, and impact on your investments.
Features | Personal Loan | Loan Against Mutual Funds |
Type of Loan | Unsecured loan | Secured loan |
Collateral Requirement | No collateral required | Mutual fund units are pledged as collateral |
Interest Rates | Usually around 10%-24% per year, depending on credit score and lender | Typically around 8%-15% per year, since the loan is backed by investments |
Loan Eligibility | Depends on factors such as income, credit score, job stability, and overall repayment ability. | Based on the value and type of mutual fund investments |
Loan Amount | Depends on income and credit profile. Usually starts from ₹25,000, depending on the lender | Usually, 50% of equity MF value and 60-80% of debt MF value |
Repayment Structure | Repaid through fixed EMIs that include both principal and interest every month over the loan tenure | Often structured as an overdraft facility, where interest is paid only on the amount used |
Processing Time | Typically 1-3 working days | Often faster; some lenders approve within a few hours after pledging units |
When Could a Personal Loan Be the Right Option?
You may consider taking a personal loan if:
- You don’t have mutual fund investments
- You need a larger loan amount quickly
- You prefer structured monthly repayments
- You don’t want to pledge your investments
When Is a Loan Against Mutual Funds a Better Option?
This option works well if:
- You already have a sizeable mutual fund portfolio
- You need short-term liquidity
- You want lower interest rates
- You want to avoid redeeming long-term investments
Conclusion
Both personal loans and loans against mutual funds can help you access funds when needed, but they work differently. A personal loan is easier to get since it does not require collateral, but it usually comes with higher interest rates. A loan against mutual funds, on the other hand, may offer lower interest rates and allow your investments to remain in the market.
If you’re unsure which option is better for your situation or want to understand the process more clearly, you can connect with Ashvvy Investments for better guidance.
