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Bitcoin vs Mutual Funds: What is Better to Invest in?

18 November 2021
5 minutes

Before you as an investor choose between bitcoin and mutual fund. Let’s understand what cryptocurrencies mean.

What are Cryptocurrencies?

Cryptocurrencies are also known as digital currency are known as lines of computer code that hold monetary value. Governments have no control over the creation of cryptocurrencies, which is what initially made them so popular.

Most cryptocurrencies begin with a market cap in mind. This means that their production will decrease over time. Thus, ideally, making any particular coin more valuable in the future.

Bitcoin was the first cryptocurrency ever invented in 2009 by a developer named Satoshi Nakamoto.

Other coins created post it is called altcoins such as Ethereum, Litecoin, Peercoin, and Feathercoin.

Bitcoin can be stored on a person’s computer hardware that is offline. This is referred to as cold storage. The currency can also be stored online which is referred to as hot storage (the risk is high of being stolen).

What are mutual funds?

A mutual fund is an investment vehicle where investors pool their money and invest in various financial instruments. These include stocks, shares of companies, bonds, and debt instruments. Mutual funds, depending on the investment made, will generate wealth depending on the market conditions.

Mutual funds (MFs) are managed by a fund manager. He/she, based on experience and professional knowledge, decides where the money is to be invested to generate returns higher than the benchmark. Benchmarks could be NIFTY 50 or Sensex indices or any other indices.

Mutual Fund industry is regulated by SEBI and the profit/gains are taxable as per regulations and circular issued by the Centre.

Investment in Bitcoin

There are 2 ways to make investments in bitcoins

  • Mobile applications and platforms

Buy BTC (Bitcoin) and hold them until you make a profit and simply sell them. This can be done through various platforms such as zebpay, uncoin, and coinsecure.

It’s no doubt that whoever invested in the initial coin offering of the bitcoins now would have gained millions by a mere investment of Rs 50,000 or less. The currency has sky-rocketed since its launch in the year 2007, and people are still continuing to invest in a hope that someday it would make them rich.

There are other platforms for bitcoin and altcoins investment as well. These include Poloniex and Coindesk.

Investors are advised to analyze each and every platform before signing up or starting investing, and we neither endorse nor criticize any platform.

  • Mining

If you have some old computers that are lying around without any use, you can convert them into mining machines and start earning crypto coins.

Depending on your hardware capacity, coins can be collected to make profits. However, there is an issue with that.

First, each of the coins requires a different set of hardware. For instance, for Bitcoins or Litecoins there are some specifically tailored machines that can mine the coins at a much faster speed than an average computer.

Second, if you are not comfortable with setting up your own gear at home for mining, there are some online companies. These can help you set up your mining system instantly in the cloud. But you will have to pay monthly subscription charges depending on the computation power you have rented.

Also read: How to buy Bitcoins in India

Investment in mutual funds:

Mutual funds can be purchased directly from a mutual fund company, a bank, or a brokerage firm. Before you can invest you will need to have an account with one of these institutions prior.

The process of buying a mutual fund can be done over the phone, online, or in-person if you are dealing with a financial representative.

To place an order, it would indicate how much money you want to invest and what mutual fund you want to purchase.

Also read: How to Invest in Mutual Funds

What are the Risks Involved in Bitcoin and Mutual Funds?

Risk involved in Bitcoin

  1. The cryptocurrency market is highly unstable. For instance, Ethereum, at the beginning of the year 2017, the price was close to approximately $40, which later increased to approximately $400 and it came down to aorund $150-$200.
  2. It is not made legal in many countries. It means, in case of any default or fraud or market crashes, there is no recourse for your money. Though a few countries have made crypto currencies legal.
  3. Given that it’s a relatively new instrument in the market (in India), it will take a few years to understand the working. Further, as it is directly linked to the global market, the volatility is high. This makes it a very risky bet. 

Risks Involved in Mutual Funds

  1. Before investing in any mutual fund plans, it is important to check the investment instruments made by a mutual fund house. These include sectors of investments, stocks, and other investment instruments such as AT1 bonds, and commercial papers. Ideally, 3-5 years are expected to gain a good amount of return, around 20-35% in mutual funds.
  2. While the risks of capital loss are relatively low, it is not completely out of sight. If the market crashes, there are chances that it can erode the capital. MFs are dependent on the market. For instance, the market crash in March last year due to the spread of Covid-19 had eroded the capital of many investors. However, the market soon recovered and so have the returns.
  3. Another important thing to note is the taxation of returns from mutual funds. It is subject to both long-term and short-term capital gains tax.

Is Bitcoin Legal in India?

Bitcoin trading is not yet made legal in India. However, many market experts expect the Government of India to introduce laws where earnings from cryptocurrencies could be taxed thereby accepting BTC.

But right now, the risk is only yours.

Bitcoin or Mutual Funds: Which to Invest in?

Bitcoin Mutual Fund
Legal aspect Not legal in India Legal
Risk taken Lot of risk(since government also doesn’t intervene) Subject to market conditions, but compared to bitcoins lower risk
Returns on investment Very unstable, value of BTC can change within seconds Comparatively stable (with the help of expert advice high growth returns can be expected)
Withdrawal mechanism Not so easy (takes lot of time) Easy and amount can be withdrawn at any time(provided applicable tax)
Transparency Not sure whether it is commodity or currency Transparent based on the value of NAV and other holdings seen through various websites.

A simple rule of Warren Buffet goes here “If you don’t understand it, don’t invest in it”.

But cryptocurrecies are still in their nascent phase in many countries, so the probable solution is to wait and watch for bitcoins.

Happy investing!

Disclaimer: The views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.

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