When you need quick access to money, two popular secured loan options in India are gold loans and loans against mutual funds. Both let you borrow without selling your assets, but they work quite differently.
This post compares the two across every factor that matters — so you can decide which one fits your situation better.
The Basics
Gold Loan
A gold loan is a secured loan where you pledge your physical gold jewellery or coins with a bank or NBFC. The lender keeps your gold in a vault until you repay the loan. Once repaid, your gold is returned.
Loan Against Mutual Funds (LAMF)
A loan against mutual funds is a secured loan where your mutual fund units serve as collateral. A lien is marked on your units, but they remain in your portfolio. You continue to earn returns on them while the loan is active.
Head-to-Head Comparison
| Factor | Gold Loan | Loan Against Mutual Funds |
|---|---|---|
| Collateral | Physical gold (jewellery, coins) | Mutual fund units (equity, debt, hybrid) |
| Where collateral is kept | Physically with the lender | Remains in your portfolio with a lien |
| LTV Ratio | Up to 75% (RBI regulated) | 50% to 80% depending on fund type |
| Interest Rate | 7% to 15% per annum | 9% to 12% per annum |
| Processing Time | 30 minutes to a few hours | Minutes to a few hours (digital process) |
| Processing Fee | 0.5% to 2% | Nil to 1% |
| Tenure | 3 months to 3 years | Up to 12-36 months, often revolving |
| Collateral earns returns? | No — gold sits in a vault | Yes — your mutual fund units continue to grow |
| Physical visit needed? | Yes — you must bring gold to the branch | No — fully digital in most cases |
| Prepayment charges | Usually nil | Usually nil |
| Risk of losing collateral | Gold auctioned if you default | Units liquidated if you default |
Key Differences Explained
1. Your Collateral Keeps Working (or Doesn’t)
This is perhaps the biggest difference.
When you pledge gold, it goes into the lender’s vault. It sits there, doing nothing. Gold does not earn dividends, interest, or compound returns. Its value may go up or down with gold prices, but it is not actively working for you.
When you pledge mutual fund units, they continue to stay invested. An equity fund pledged as collateral still participates in market movements. A debt fund still earns interest. Your wealth keeps growing even while the loan is active.
2. Convenience
Gold loan requires a physical branch visit. You need to carry your gold, get it appraised, wait for purity testing, and sign paperwork. Some lenders have streamlined this, but it still requires an in-person visit.
Loan against mutual funds can be entirely digital. Many platforms allow you to select your mutual fund holdings, get an instant loan offer, accept it, and receive the money — all from your phone or computer, without stepping out.
3. LTV Ratios
The RBI caps gold loan LTV at 75%. So if your gold is worth ₹10 lakh, you can borrow up to ₹7.5 lakh.
For loans against mutual funds, LTV varies:
- Equity mutual funds: Typically 50% to 65%
- Debt mutual funds: Typically 70% to 80%
- Liquid funds: Up to 80%
If you hold debt or liquid funds, you may actually get a higher LTV than a gold loan. For equity funds, the LTV is usually lower because of higher volatility.
4. Interest Rates
Gold loans can have a wide range — from about 7% at banks to 15% or more at some NBFCs. The rate depends on the lender, loan amount, and tenure.
Loans against mutual funds typically range from 9% to 12%. The rates are competitive because the collateral (mutual fund units) is easy to liquidate and has transparent pricing.
5. What Happens if You Default
Gold loan default: If you fail to repay, the lender can auction your gold after giving you notice. You lose your gold permanently.
LAMF default: If you fail to repay and the value of your collateral falls below the required threshold, the lender can liquidate your mutual fund units. You lose those units, but the process is more transparent since mutual funds have clear daily NAV pricing.
When Gold Loan Makes More Sense
- You have gold jewellery that is not being worn or used
- You do not have significant mutual fund investments
- You need a loan in a location where digital LAMF services are not easily accessible
- Your gold is of high purity and gets a good valuation
- You prefer very short-term borrowing (a few months)
When Loan Against Mutual Funds Makes More Sense
- You have a substantial mutual fund portfolio
- You want your collateral to continue earning returns while pledged
- You prefer a fully digital, paperless process
- You do not want to physically transport valuables to a bank
- You want the flexibility of an overdraft (draw and repay as needed)
- You want to avoid the hassle of gold appraisal and purity testing
Can You Use Both?
Yes. There is nothing stopping you from having a gold loan and a loan against mutual funds at the same time, if you have both types of assets. Some people use a combination based on their immediate need:
- A gold loan for a very short-term need where they want quick cash from a nearby branch
- A loan against mutual funds for a medium-term need where they want their investments to keep growing
Tax Implications
Neither gold loans nor loans against mutual funds have any direct tax implications — the act of borrowing is not a taxable event. You do not pay capital gains tax because you are not selling any asset.
However, the interest paid on either loan is generally not tax-deductible for personal use. If the loan is used for business purposes, the interest may be deductible as a business expense — consult a tax advisor for your specific situation.
Key Takeaways
- Gold loans require physical gold to be deposited with the lender; LAMF keeps your units in your portfolio
- Mutual fund units continue to earn returns while pledged; gold in a vault does not
- Gold loans may offer lower interest rates at some banks, but LAMF offers digital convenience
- LTV for debt mutual funds (up to 80%) can match or exceed gold loan LTV (75%)
- Both options are better than selling your assets or taking an expensive personal loan
- Your choice should depend on what assets you have, how quickly you need funds, and whether digital convenience matters to you
The right choice is not always one or the other — it depends on your assets, your need, and your preferences. The important thing is that both options let you borrow without giving up your long-term wealth.
