In today’s fast-paced world, financial emergencies can arise at any time. Whether it’s for a medical emergency, a family function, or funding a business, people often turn to loans to meet their financial needs. Two popular options are personal loans and loans against mutual funds. While both help you access funds quickly, their features, interest rates, and repayment options differ significantly.
This guide breaks down the differences between the two and helps you decide which option suits your financial needs best.
🔍 What is a Personal Loan?
A personal loan is an unsecured loan offered by banks and NBFCs that can be used for any purpose — be it travel, wedding, education, or emergency expenses. Since there’s no collateral involved, the interest rates are usually higher.
✅ Key Features of Personal Loans:
- No need for collateral
- Quick approval and disbursal
- Fixed EMI repayment
- Higher interest rates (10% – 24% p.a.)
📈 What is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is a type of secured loan, where you pledge your mutual fund units to the lender as collateral. In return, the lender offers a loan — usually a percentage of the fund’s current market value.
✅ Key Features of Loans Against Mutual Funds:
- Mutual fund units pledged as security
- Lower interest rates than personal loans
- Flexible repayment options
- Continue earning returns on mutual funds during the loan
🔁 Personal Loan vs Loan Against Mutual Funds: Key Differences
Here’s a comparison table that summarizes the main differences between personal loans and loans against mutual funds:
| Feature | Personal Loan | Loan Against Mutual Funds |
|---|---|---|
| Loan Type | Unsecured | Secured (against mutual fund units) |
| Interest Rate | 10% – 24% p.a. | 8% – 12% p.a. |
| Collateral Required | No | Yes (mutual fund units) |
| Loan Amount | Up to ₹40 lakhs or more | Up to 60-70% of NAV |
| Processing Time | Quick (24–72 hours) | May take 2–4 working days |
| Credit Score Dependency | High | Moderate |
| Impact on Mutual Fund Holdings | None | Units are lien-marked, not sold |
| Risk of Liquidation | No | Yes, if fund value drops significantly |
| Repayment Flexibility | Fixed EMIs | Flexible (overdraft-like facility) |
| Tax Benefits | None | None |
💡 Pros and Cons
Let’s dive deeper into the advantages and disadvantages of both options to help you choose smartly.
✅ Pros of Personal Loans:
- No asset pledge required
- Quick disbursal
- Ideal for borrowers with high credit scores
❌ Cons of Personal Loans:
- Higher interest rates
- Heavy penalties on default
- EMI burden from day one
✅ Pros of Loan Against Mutual Funds:
- Lower interest rate
- Mutual funds continue to grow
- Flexible repayments (only interest may be paid monthly)
❌ Cons of Loan Against Mutual Funds:
- Pledged units can’t be redeemed until loan is cleared
- Risk of liquidation if NAV drops
- Limited loan amount based on fund value
🧠 When to Choose a Personal Loan?
Opt for a personal loan when:
- You need urgent cash and don’t have mutual funds to pledge.
- You do not want to touch your investments.
- You have a good credit score (700+), which qualifies you for a better rate.
- You need a fixed EMI plan for structured repayment.
🧠 When to Choose a Loan Against Mutual Funds?
Choose a loan against mutual funds when:
- You have substantial mutual fund holdings.
- You want a lower interest rate loan.
- You need a flexible repayment structure.
- You want to retain your investment and still raise funds.
📊 Eligibility Criteria: Personal Loan vs LAMF
| Criteria | Personal Loan | Loan Against Mutual Funds |
|---|---|---|
| Age | 21 to 60 years | 21 to 65 years |
| Income | ₹15,000 – ₹30,000+ (monthly) | Not mandatory (value of MF is key) |
| Credit Score | 700+ preferred | 650+ preferred |
| Employment | Salaried or self-employed | Any individual holding MFs |
| Collateral | Not required | Mutual fund units |
🏦 Interest Rates Comparison: Major Banks/NBFCs
| Lender Name | Personal Loan Interest Rate | LAMF Interest Rate |
|---|---|---|
| HDFC Bank | 10.5% – 21% p.a. | 9% – 10.5% p.a. |
| ICICI Bank | 10.75% – 19% p.a. | 8.5% – 10.25% p.a. |
| Axis Bank | 10.99% – 20.5% p.a. | 8.75% – 11.5% p.a. |
| Bajaj Finserv | 11% – 24% p.a. | Not Available |
| SBI | 10.5% – 15% p.a. | 9% – 11% p.a. |
Note: Interest rates are indicative as of July 2025 and may vary based on applicant profile and lender policy.
📃 Documentation Required
Personal Loan:
- PAN Card
- Aadhaar Card / Address proof
- Salary slips (last 3 months)
- Bank statements
- Form 16 or ITR (for self-employed)
Loan Against Mutual Funds:
- PAN Card
- Aadhaar Card
- Mutual fund folio details
- Lien marking consent form
🛠️ Application Process
📌 Personal Loan:
- Visit bank/NBFC or apply online
- Submit documents
- Get credit assessed
- Receive approval and disbursal
📌 Loan Against Mutual Funds:
- Visit bank offering LAMF
- Submit MF folio details
- Sign lien-marking agreement
- Get loan disbursed to your account
💬 Expert Tip
“If you hold equity mutual funds that are performing well, taking a loan against them makes sense instead of redeeming them prematurely. You can preserve long-term wealth creation while solving short-term liquidity needs.”
📈 Real-Life Scenario Example
Let’s understand with an example:
| Parameter | Personal Loan | Loan Against Mutual Funds |
|---|---|---|
| Loan Amount | ₹5,00,000 | ₹5,00,000 |
| Interest Rate | 14% p.a. | 9% p.a. |
| Tenure | 3 years | 3 years |
| EMI | ₹17,078 | ₹15,899 |
| Total Interest Payable | ₹1,13,000 approx. | ₹73,000 approx. |
As seen above, Loan Against Mutual Funds saves you nearly ₹40,000 in interest over 3 years.
🧾 Tax Implications
There are no tax benefits for either personal loans or loans against mutual funds. However:
- If you use a personal loan for home renovation or purchase, partial tax deductions under Section 24(b) may apply.
- LAMF does not lead to capital gains tax as units are not sold — they are just lien-marked.
✅ Final Verdict: Which One Should You Choose?
| Situation | Best Loan Option |
|---|---|
| Need urgent money with no assets | Personal Loan |
| Want lower interest rate | Loan Against Mutual Funds |
| Planning short-term working capital | LAMF (due to flexibility) |
| Don’t want to risk MF holdings | Personal Loan |
| Strong mutual fund portfolio | Loan Against Mutual Funds |
📌 Conclusion
Choosing between a personal loan and a loan against mutual funds depends largely on your current financial condition, investment portfolio, and urgency of the need. While personal loans offer instant funds without any collateral, loans against mutual funds are more cost-effective if you already have strong MF investments.
Before making a decision, assess your repayment capacity, risk tolerance, and long-term financial goals.
🔎 Frequently Asked Questions (FAQs)
Q1. Can I get a loan against SIPs?
Yes, you can pledge units accumulated via SIPs, provided they are in demat or folio form.
Q2. Will my mutual funds stop earning returns during the loan period?
No, your mutual funds continue to generate returns even when pledged.
Q3. What if the market crashes after I take a loan against mutual funds?
If the fund NAV falls significantly, the lender may ask you to repay part of the loan or pledge additional units.
Q4. Can I prepay my loan early?
Yes, most lenders allow foreclosure for both loan types. Some may charge a nominal fee.