Most of us consider leveraging our assets to secure funds when in need of immediate funds. Loans against mutual funds and gold loans are common financial products that can offer financial assistance in times of need. However, choosing between these two secured loans often becomes a daunting task.
In this blog, we discuss the loan against mutual funds vs. gold loans debate in detail to help you make a wise choice.
A gold loan is a secured loan you can obtain by pledging your gold ornaments to the lender. The pledged gold remains with the lender until the debt is paid off. Moreover, the lender reserves the right to auction off the gold items if you fail to repay the loan.
A loan against mutual funds is a credit facility that allows you to pledge your mutual fund units as collateral to secure a loan amount. The lender holds your mutual fund units until you repay the loan while your investments continue to earn returns.
You should be cognizant of the differences between loans against mutual funds and gold loans to choose wisely between these two options. Here’s a side-by-side comparison to clarify the loan against mutual funds vs. gold loan debate:
The differences highlighted in the loan against mutual funds vs. gold loan comparison clearly show that both have their merits and demerits. You can choose a LAMF for short-term credit requirements and pay interest only on the sum used. Alternatively, you can opt for gold loans if you require credit for a longer duration and prefer flexible repayment options. At the end of the day, your choice should coincide with the assets you own, your repayment capacity, and immediate funding requirements.
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Your MF units should fall under the select list of mutual fund schemes approved by the lender for the LAMF facility. For a gold loan, your assets should meet the lender’s purity bar, i.e., range from 18-22 Karat.
The NAV of the asset decides the LTV ratio for a LAMF. The cap for LTV is set at 50% of the NAV for equity funds and 80% of the NAV for debt funds. The LTV ratio is capped at 75% of the gold’s market value for gold loans.
Generally, interest rates for LAMF are lower than gold loan interest rates. Interest rates for LAMF can range from 10%-12%, while gold loans can range from 7%-20%.
No. As such, no tax implications or benefits are associated with either loan against mutual funds or gold loans.
For LAMF, you can pay only the interest monthly, paying the principal at the end of the tenure. You can choose different repayment options for gold loans, including one-shot payments, EMIs, bullet payments, or deferred principal payments.