When you need money urgently, two common options are a personal loan and a loan against mutual funds (LAMF). Both give you access to funds, but they work very differently — and the cost difference can be significant.

Let us break down both options so you can make an informed choice.

How They Work

Personal Loan

A personal loan is an unsecured loan — you do not need to pledge any asset as collateral. The bank or NBFC lends you money based on your income, credit score, and repayment capacity. Since there is no collateral backing the loan, the lender takes on more risk, which means higher interest rates for you.

Loan Against Mutual Funds

A loan against mutual funds is a secured loan — your mutual fund units serve as collateral. A lien is placed on your units, and you receive a loan based on a percentage of their current value. Since the lender has collateral to fall back on, the risk is lower, which translates to lower interest rates.

The Comparison

Let Us Talk Numbers

Suppose you need ₹5,00,000 for 1 year. Here is what each option would cost:

Personal Loan at 16% interest

• Monthly EMI: ~₹45,400
• Total interest paid: ~₹44,800
• Processing fee (2%): ₹10,000
• Total cost: ~₹54,800

Loan Against Mutual Funds at 10.5% interest

• If overdraft: Pay interest only on amount used, repay principal anytime
• Interest for 1 year: ~₹52,500
• Processing fee: Nil
• Prepayment: No charges if you repay early
• Total cost: ₹52,500 or less (less if you repay partially during the year)

The LAMF costs slightly less even in this simple comparison. But the real advantage shows up when you consider:

1. No processing fee saves ₹10,000 upfront
2. No prepayment penalty means if you repay in 6 months, you pay interest for only 6 months (~₹26,250)
3. Your mutual fund units keep earning returns — if your fund earns 12% during the year, the effective cost of borrowing becomes even lower

Beyond Interest Rates: Other Differences

Eligibility

Personal loans have strict eligibility criteria. You need a good credit score (typically 700+), stable income proof, and may be rejected based on your employer profile or existing loan obligations.

LAMF has simpler eligibility — if you have mutual fund holdings of sufficient value, you can get a loan regardless of your employer, salary structure, or credit history. The collateral speaks for itself.

Speed

Personal loan approval can take anywhere from a few hours (for pre-approved offers) to several days. Documentation requirements can slow things down.

LAMF can be processed in minutes through digital platforms. Since the collateral is already in electronic form (mutual fund units), verification is fast.

Repayment Flexibility

Personal loans typically require fixed monthly EMIs. You must pay the same amount every month for the entire tenure, regardless of whether you have surplus cash or tight months.

LAMF, especially when structured as an overdraft, offers much more flexibility:

• Draw only what you need
• Repay when you have surplus
• Pay interest only on the amount used
• No fixed EMI obligation in many cases

This flexibility is especially valuable for irregular income earners, business owners, or anyone with unpredictable cash flows.

Impact on Credit Score

Every personal loan appears on your credit report and affects your debt-to-income ratio. If you have too many personal loans or a high outstanding balance, it can reduce your credit score and make future borrowing difficult.

LAMF, being a secured loan, has a different impact on your credit profile. While it still appears as a liability, secured loans are generally viewed more favourably by credit bureaus than unsecured debt.

When Personal Loan Makes More Sense

• You do not have any mutual fund investments to pledge
• Your loan amount exceeds what your mutual fund portfolio can support
• You need the loan for a very long tenure (3-5 years) with fixed EMI comfort
• You have a pre-approved personal loan offer at a competitive rate

When LAMF Makes More Sense

• You have mutual fund holdings and want to use them as collateral
• You want the lowest possible interest rate
• You need quick processing with minimal documentation
• You want repayment flexibility (overdraft style)
• You want to avoid processing fees and prepayment penalties
• You do not want your credit score to be a deciding factor
• You want your investments to continue growing while you borrow

A Common Misconception

Some people think, “Why should I take a loan when I can just redeem my mutual funds?”

The answer is cost. When you redeem:

• You may pay exit load (1% if within 1 year for equity funds)
• You trigger capital gains tax (20% STCG or 12.5% LTCG on equity funds)
• You permanently lose those units and their future growth potential

A loan against mutual funds avoids all three of these costs. You keep your investments, avoid tax, and pay only the interest on the loan.

Key Takeaways

• Personal loans are unsecured and more expensive; LAMF is secured and cheaper
• LAMF offers lower interest rates, zero processing fees, and no prepayment penalty
• Personal loans have stricter eligibility; LAMF is based on your portfolio value
• LAMF provides repayment flexibility that personal loans typically do not
• Your mutual fund units continue to earn returns while pledged
• If you have mutual fund holdings, LAMF is almost always the more cost-effective option for short to medium-term borrowing

The bottom line: if you have mutual fund investments, borrowing against them is likely cheaper and more flexible than taking a personal loan. It is worth exploring before you commit to higher-cost unsecured debt.