A poor or thin credit history shuts a lot of doors. Personal loan applications get rejected outright below a certain CIBIL threshold, or approved at rates so high they defeat the purpose of borrowing in the first place. For freelancers, recent graduates, gig workers, or anyone who simply hasn't built a long credit history yet, this is a familiar and frustrating wall.
What often gets missed is that secured borrowing works on a different logic entirely. A secured line against an existing mutual fund portfolio is priced and approved based on the collateral itself, not on a credit bureau score, which opens up access to reasonably priced credit for exactly the people traditional lenders tend to turn away.
An unsecured personal loan carries no collateral, so the entire lending decision rests on the lender's confidence that the borrower will repay based on past behaviour. A credit score is essentially a summary of that past behaviour, and a low score, or no meaningful history at all, signals higher risk to a lender who has nothing else to fall back on if repayment doesn't happen. That's why unsecured lenders set hard cutoffs, often around a 700 CIBIL score, below which applications get rejected regardless of current income or ability to pay.
When a loan is backed by collateral the lender can recover value from if repayment fails, the credit score becomes far less central to the decision. The mutual fund units themselves are the security, and their market value is known and verifiable in real time. A borrower's past repayment history becomes a secondary consideration rather than the primary gatekeeper it is for unsecured credit.
This is why a loan against mutual fund holdings can be genuinely accessible to someone with no credit history at all, a recent graduate who inherited or was gifted an investment portfolio, or someone whose score took a hit from an unrelated past issue but who otherwise holds substantial, legitimate investments.
A few groups benefit from this more than most. Self-employed individuals and freelancers, whose irregular income often makes them look riskier to traditional lenders even when they're financially stable, can access credit based on an investment portfolio rather than a salary slip. Young professionals who started investing early through SIPs but haven't yet built up years of credit card or loan history get evaluated on what they've saved rather than on a thin credit file. And anyone whose credit score dipped due to a specific past event, a medical emergency, a business setback, a missed payment years ago that's no longer representative of their current situation, isn't penalised the same way a purely score based lender would penalise them.
This isn't a completely unconditional form of lending. Eligibility still depends on holding a mutual fund portfolio large enough to support a meaningful limit after loan to value calculations are applied, and on the specific schemes held actually being on the lender's approved list. Someone with no investment portfolio at all gets no benefit from this route regardless of their credit situation, since there's simply no collateral to lend against.
Credit score based lending measures trustworthiness through past borrowing behaviour, which works reasonably well for people with an established credit history but poorly for anyone who doesn't have one yet or whose score doesn't reflect their current financial reality. Collateral based lending measures something different: what's actually available to secure the loan right now. For anyone shut out by the first approach, checking whether an existing investment portfolio opens up the second is worth the few minutes it takes.