You need ₹2–10 lakh in a hurry — a medical bill, a home repair, a short cash crunch. You could take a personal loan, but you also have a mutual fund portfolio sitting in your demat account. Should you borrow against those units instead of taking an unsecured loan, or selling and losing your market position? In 2026, a loan against mutual funds (LAMF) has become a fast, low-cost alternative to a personal loan — but it isn't always the right call. Here is the honest comparison.
What is a loan against mutual funds (LAMF)?
A LAMF is a secured overdraft. You pledge (lien-mark) your mutual fund units to a lender through the registrar (CAMS/KFintech) or NSDL/CDSL — usually in a few minutes via the lender's app. The lender sets a credit limit based on the value of your units, and you withdraw only what you need. Crucially, you continue to own the units — they stay invested and keep earning returns — and you pay interest only on the amount you actually use, not the full limit.
What is a personal loan?
A personal loan is an unsecured lump sum. The bank or NBFC disburses the full amount to your account, and you repay it as a fixed EMI over 1–5 years. Because there is no collateral, your interest rate depends heavily on your CIBIL score, income and employer. There is nothing to pledge and no market risk — but the rate is higher and you pay interest on the entire amount from day one.
Head-to-head: rates, limits and costs
| Feature | Loan against mutual funds | Personal loan |
|---|---|---|
| Security | Secured (pledged units) | Unsecured |
| Interest rate (2026) | ~9–12% p.a. | ~11–24% p.a. |
| How much you get | ~45–50% of equity fund value; ~75–80% of debt fund value | Income-based, up to ~₹40 lakh |
| Interest charged on | Only the amount you use (overdraft) | The full amount disbursed |
| Processing fee | Low, sometimes nil | 1–3% of the loan |
| Tenure | Renewable (often 12 months, revolving) | Fixed 1–5 years |
| Prepayment penalty | None — repay anytime | Nil on floating-rate loans to individuals (RBI); fixed-rate may charge |
| Disbursal speed | Minutes to a few hours (fully digital) | Hours to a few days |
| Stay invested? | Yes — units keep compounding | Not applicable |
| Main risk | Margin call if the market falls | Higher rate; full-EMI burden |
How much can you actually borrow?
Lenders apply a "loan-to-value" (LTV) cap that reflects how volatile the asset is. For equity mutual funds, the limit is conservative — typically around 45–50% of the fund's value. For debt mutual funds, which barely move, you can borrow more — often 75–80%. So a ₹10 lakh equity portfolio gets you roughly a ₹5 lakh limit, while a ₹10 lakh debt fund could support ₹7.5–8 lakh. One important caveat: ELSS units cannot be pledged during their three-year lock-in, and some lenders only accept funds from an approved list.
The hidden advantage: you stay invested
The instinctive alternative — selling units to raise cash — has two hidden costs that a LAMF avoids. First, you exit the market and lose future compounding on that money. Second, you trigger capital gains tax: long-term gains on equity funds above ₹1.25 lakh a year are taxed at 12.5%, and short-term gains at 20%. With a LAMF you raise the same cash, keep your units invested, and pay no capital gains tax — you only pay interest on what you borrow. If your portfolio is expected to grow faster than the ~10% loan rate, staying invested usually comes out ahead.
When a personal loan still wins
- You have no investments to pledge — or your only holdings are locked-in ELSS or an employer's NPS.
- You want a long, fixed tenure — a personal loan's 3–5 year EMI gives certainty; a LAMF overdraft is meant for shorter, revolving needs.
- The ticket is small and quick — for ₹50,000 over a few months, a pre-approved personal loan may be simpler than pledging units.
- You don't want market risk on your borrowing — a personal loan's repayment never changes with the Sensex; a LAMF can trigger a margin call.
The real risk: a margin call
Because your loan is backed by units whose value moves with the market, a sharp fall can push your outstanding above the allowed LTV. The lender then issues a margin call — asking you to repay part of the loan or pledge more units within a short window. If you don't, they can sell your pledged units to recover the money, possibly at the worst time. The defence is simple: never borrow near your maximum limit. Borrowing 30–35% of your portfolio value instead of the full 50% leaves a cushion for normal market swings.
How to take a loan against mutual funds
- Choose a lender — several banks and digital NBFCs offer LAMF entirely online.
- Complete KYC and link the mutual fund folios you want to pledge.
- The units are lien-marked via CAMS/KFintech or the depository; you keep ownership.
- An overdraft limit is set against the eligible value; withdraw what you need.
- Pay interest only on the used amount; repay and re-use the limit as required.
Estimate either option's cost first: model a personal loan with our personal loan EMI calculator, and compare related routes in personal loan vs credit card EMI and gold loan vs personal loan. If your cash need is to clear an expensive card balance, read our guide on getting out of credit card debt first.
Frequently Asked Questions
What is the interest rate on a loan against mutual funds in 2026?
Most lenders charge roughly 9–12% a year on a loan against mutual funds in 2026 — lower than an unsecured personal loan because your units act as collateral. You pay interest only on the amount you actually draw from your overdraft limit, not the full sanctioned amount.
How much loan can I get against my mutual funds?
Lenders typically offer around 45–50% of the value of equity mutual funds and 75–80% of debt mutual funds. So a ₹10 lakh equity portfolio supports roughly a ₹5 lakh limit. ELSS units under their three-year lock-in cannot be pledged.
Is a loan against mutual funds better than a personal loan?
It is usually cheaper (9–12% vs 11–24%), faster to disburse, and lets you keep your units invested without triggering capital gains tax. A personal loan wins when you have no investments to pledge, need a long fixed tenure, or want repayment that is immune to market swings.
Do I still earn returns on pledged mutual funds?
Yes. Pledging only places a lien on the units — you remain the owner, and they continue to track the market and earn returns. You simply cannot redeem the pledged units until you repay and the lien is released.
What happens if the market falls after I take a loan against mutual funds?
If the value of your pledged units drops enough that your loan exceeds the allowed loan-to-value, the lender issues a margin call, asking you to repay part of the loan or pledge more units. If you don't act, they can sell your units to recover the dues. Borrowing well below your maximum limit protects you from this.
Can I get a loan against ELSS or SIP mutual funds?
Units you bought through a SIP can be pledged once they are no longer under any lock-in. ELSS (tax-saver) units, however, are locked for three years from each instalment and cannot be pledged until that period ends. Lenders also maintain an approved list of fund houses and schemes they accept.
The bottom line: if you already hold mutual funds and need short-term cash, a loan against them is usually the cheaper, smarter route — provided you borrow conservatively to stay clear of a margin call. If you have no assets to pledge or want a long fixed tenure, a personal loan is the cleaner choice. Compare live options on the loans hub.
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