When you need funds to meet unexpected expenses or pursue opportunities, two popular options come to mind: loans against mutual funds and personal loans. Both have their advantages and limitations, and understanding them can help you make the right choice based on your financial situation and goals.
This article will delve into the key differences, benefits, drawbacks, and practical Indian examples of both types of loans. We’ll also provide actionable insights to help you decide which one suits your needs best. For more financial tips and expert guidance, visit RichPath.in—your go-to resource for personal finance and investment strategies.
Understanding the Basics
What is a Loan Against Mutual Funds?
A loan against mutual funds allows you to borrow money by pledging your mutual fund units as collateral. This secured loan lets you access liquidity without redeeming your investments, ensuring they continue to grow.
What is a Personal Loan?
A personal loan is an unsecured loan that you can avail of without pledging any asset. It is based on your creditworthiness, income, and repayment capacity.
Key Differences Between Loan Against Mutual Funds and Personal Loan
| Feature | Loan Against Mutual Funds | Personal Loan |
|---|---|---|
| Collateral | Required (mutual fund units) | Not required |
| Interest Rate | Lower (9-12%) | Higher (12-18%) |
| Processing Time | Faster (minimal documentation) | Moderate |
| Loan Amount | Based on mutual fund value | Based on income and credit score |
| Impact on Investments | Investments remain intact | Not applicable |
| Risk of Default | Pledged units may be liquidated | No asset seizure, but credit score affected |
Benefits of Loan Against Mutual Funds
- Retain Investment Growth: Your mutual funds continue to earn returns even after being pledged.
- Lower Interest Rates: Secured loans typically have more affordable interest rates than unsecured ones.
- Tax Efficiency: Avoid capital gains tax and exit loads by not redeeming your mutual funds.
- Quick Access to Funds: Many lenders now offer digital lien marking, enabling quick disbursement.
Benefits of Personal Loans
- No Collateral Required: Ideal for individuals without significant assets to pledge.
- Flexibility in Usage: Use the funds for any purpose, from travel to home renovations.
- Easy Application Process: Widely available with straightforward eligibility criteria.
Practical Indian Example: Comparing the Two Options
Scenario 1: Suresh’s Medical Emergency
Suresh, a 35-year-old IT professional in Bengaluru, needed ₹3 lakh for his father’s medical treatment.
- Option 1: He pledged his mutual funds worth ₹7 lakh and availed a loan against them at 10% interest.
- Monthly Interest Payment: ₹2,500 (₹3,00,000 x 10% ÷ 12).
- Investment Growth: His mutual funds continued earning annual returns of 12%.
- Option 2: He opted for a personal loan at 15% interest.
- Monthly EMI: ₹7,050 for a tenure of 5 years (based on EMI calculator).
- No Asset Involvement: But a higher interest outgo over the tenure.
Result: Suresh chose the loan against mutual funds, preserving his investment growth and saving on interest costs.
Key Considerations Before Choosing
Loan Against Mutual Funds:
- Suitable For:
- Individuals with a diversified mutual fund portfolio.
- Those seeking lower interest rates and tax efficiency.
- Limitations:
- Dependent on market performance. A drop in mutual fund value could lead to margin calls.
- Restricted to the lien-marked units until the loan is repaid.
Personal Loan:
- Suitable For:
- Individuals without collateral.
- Situations requiring higher loan amounts based on income.
- Limitations:
- Higher interest rates.
- Stricter credit score and repayment history checks.
Tax Implications
- Loan Against Mutual Funds:
- No tax benefits on interest paid.
- No immediate capital gains tax as the investments are not redeemed.
- Personal Loan:
- No tax benefits unless used for specific purposes like home construction or business expansion.
Situations to Choose Each Option
Choose Loan Against Mutual Funds When:
- You have mutual fund investments and prefer lower interest rates.
- You want to retain your portfolio’s growth potential.
- The financial need is moderate and aligns with the value of your investments.
Choose Personal Loan When:
- You don’t have sufficient investments to pledge.
- You need a larger loan amount based on your income.
- You prefer unsecured loans without involving any assets.
Tips to Maximize Benefits
- Evaluate the Costs: Compare total interest payable, processing fees, and other charges for both options.
- Assess Your Portfolio: Ensure your mutual funds are not exposed to high volatility before pledging them.
- Check Lender Terms: Understand the lien process and repayment flexibility for loans against mutual funds.
Conclusion: Which is Better?
Both loans against mutual funds and personal loans have their unique advantages. The right choice depends on your financial situation, needs, and goals.
- Loan Against Mutual Funds is ideal if you have an investment portfolio and want a cost-effective, secured loan while preserving your wealth creation.
- A personal Loan is a better choice if you need quick funds without collateral and have a strong credit profile.
For expert financial insights, visit Rich Path. and start your investment journey today! 🚀
Read more –
Top 5 Mutual Funds for Long-Term Growth in India in 2025
Best Mutual Funds: How to Choose – A Complete Guide
Best Flexi Cap Mutual Funds to Invest in 2025
Did this article help you? Like, share, and comment below to let us know your thoughts or suggest topics you’d like us to cover!
