Loans against Mutual Funds vs. Credit Cards: Which is Better for Your Needs?
Feb 14, 2025
When you’re in a financial pinch and need quick access to funds, you have a few options at hand. Two common choices are loans against mutual funds and credit card loans - each with its own pros and cons. Understanding these options can help you make the smartest financial decision.
At MyFi, we think it’s crucial to understand the pros and cons of each option so you can choose what works best for you. We’re here to help you navigate your financial choices - so let’s dive into the details of loans against mutual funds vs. credit card loans. Ready to get started?
What is a Loan Against Mutual Funds and How Does It Work?
When you take out a loan against your mutual funds, you’re essentially borrowing money using your investments as collateral. This option has gained significant traction in India—and for good reason. It offers competitive interest rates and flexible terms. If you choose this route, the bank or lender will assess the value of your mutual fund portfolio to determine your loan eligibility.
How Much Can You Borrow?
Equity Funds: Up to 50% of the Net Asset Value (NAV).
Debt Funds: Up to 80% of NAV.
Interest Rates: Typically 8-12% per year.
Because mutual fund units act as security, lenders face lower risks, leading to better loan terms.
Pros and Cons of Taking a Loan Against Mutual Fund
Advantages | Disadvantages |
|---|---|
Interest rates are generally lower than what you’d get with unsecured loans | Your mutual fund units are stuck as collateral for the time being |
You won’t have to sell off your mutual fund investments | Market ups and downs could mess with your loan-to-value ratio |
You can keep your investments in the market and still have a chance at earning returns | This option is just for those who already have mutual fund investments |
Repayment terms are quite flexible, typically ranging from 1 year to about 5 years | You may need to provide additional collateral if fund value drops significantly |
Higher loan amounts can be borrowed based on the value of your portfolio | Processing time might be longer compared to credit card loans |
When you apply, it won’t affect your credit score at all |
Getting to know loan against credit card
Loan against credit card, is a pre-approved loan based on your available credit limit and past card usage. You can utilize this loan in two ways:
Convert specific purchases into EMIs.
Borrow cash up to your credit limit.
The biggest advantage is quick access to funds with minimal paperwork.
Credit card loans – advantages and disadvantages
Advantages | Disadvantages |
|---|---|
You can get funds right away | Higher interest rates, often ranging from 18% to 36% per annum |
Simple and minimal documentation | Impact on credit card limit availability |
If you’re an eligible cardholder, there are some pre-approved offers | Stricter eligibility criteria based on credit score |
No need for collateral, which makes it easier | Usually, smaller loan amounts compared to loans against mutual funds |
You can also choose fixed EMI options that suit you better | Shorter repayment tenure options |
The whole process is pretty quick | Can affect your credit score if not managed properly |
The table below gives you the bird’s eye view about the difference between loans against mutual funds vs. credit cards -
Feature | Loans Against Mutual Funds | Loans Against Credit Card |
Collateral | Mutual Fund Investments | Credit Card |
Interest Rates | Generally lower than personal loans | Generally, very high |
Loan Amount | Limited by investment value | Limited by credit limit |
Repayment | Flexible options | Flexible options |
Risk | Market risk to investment value | Risk of high debt and credit impact |
Tax Benefits | Potential tax deductions on interest | No tax benefits |
Eligibility | For those with substantial mutual fund investments | For short-term, emergency needs |
Choose a Loan Against Mutual Funds If:
You have a strong mutual fund portfolio.
You need a larger loan amount.
You want lower interest rates.
You can wait for loan processing.
You prefer secured lending options.
Choose a Credit Card Loan If:
You need instant funds.
You require a smaller loan amount.
You don’t have mutual fund investments.
You prefer minimal paperwork.
You’re comfortable with higher interest rates for quick access.
So, when it comes to picking between loans against mutual funds and credit cards, it boils down to your own financial situation and needs. At MyFi, we suggest evaluating the following factors before making your decision:
How urgently do you need the funds?
What mutual fund investments do you have available?
How sensitive are you to interest rates?
How much money do you actually need?
What’s your preferred repayment time frame?
Are you comfortable with the documentation involved?
No matter which option you choose, having a solid repayment plan is key. Consider your monthly income, existing debts, and emergency fund before taking on new debt. Both loan types can be valuable financial tools - if used wisely and in line with your needs.
Need personalized guidance? The financial experts at MyFi are here to help you find the best borrowing option for your situation
You can find us at : Twitter | Linkedin | Instagram
Download the app : Android | iOS
FAQs
1. Which loan has a lower interest rate?
Loans against mutual funds generally have lower interest rates (8-12%) compared to credit card loans (18-36%).
2. Can I lose my mutual funds if I take a loan against them?
Only if you default on the loan. Otherwise, your investments remain intact.
3. How quickly can I get a credit card loan?
Credit card loans are processed almost instantly, while loans against mutual funds take longer.
4. Will a credit card loan impact my credit score?
Yes, especially if you use a high portion of your credit limit or miss payments.
5. Are there tax benefits for these loans?
Loans against mutual funds may have tax benefits in certain cases, while credit card loans do not.
Charu Dwivedi
Charu Dwivedi is a finance content writer at MyFi, where she breaks down market trends and AI-driven investment strategies, making finance accessible for all investors.
