Investing in cryptocurrency has caught the imagination of global investors. However, they are quite different from mutual funds in terms of investment regulations and processes.
The following sections will provide a clear idea about how investing in virtual currencies is different from mutual funds.
Investment in Cryptocurrency
The cryptocurrency market deals with popular coins such as Bitcoin, Ethereum, Litecoin etc. The price of digital currencies typically depends on various factors, including demand, and stability. Furthermore, these digital currencies do not have a centralised system, and, therefore, their prices tend to fluctuate depending on the algorithm, network capabilities and demand.
Individuals can make financial gains by investing in cryptocurrency. To do this, they need to buy coins and hold them until they can sell them at significant profits. But crypto is easily one of the riskiest assets in the world with wide fluctuations that go both ways. Today, various online platforms allow investors to purchase or sell cryptocurrencies. Before investing in cryptos, one needs to consider various factors like total market value, age, etc.
Investment in Mutual Funds
Mutual funds are investment vehicles that allocate their fund corpus to various asset classes like equity and debt. Fund managers of mutual fund schemes are responsible for analysing and trading securities.
Mutual funds offer professional money management for those who do not have the time or knowledge to make consistent gains from the market. They also offer the advantage of governance, regulation, diversification, lower cost, transparency, and liquidity.
Here are some aspects that investors might want to consider before investing in mutual funds:
A Brief Comparison between Cryptocurrency and Mutual Funds
Here is a tabular representation of the differences between mutual funds and cryptocurrency:
|These are virtual assets used as a medium of transactions between crypto owners.||This is a professionally managed pool of funds collected from different investors.|
|Investors have to directly purchase crypto coins to invest.||A fund manager invests in financial instruments (stocks, bonds, etc.) on the behalf of investors.|
|They are decentralised products, with their exact status unknown in India.||These are recognised financial products regulated by SEBI and RBI.|
|Cryptocurrencies like Bitcoin have generated the highest returns among different asset classes.||Different mutual funds provide different returns (depending on asset allocation, market performance, investment objective, etc.)|
|They have minimal investment costs.||Investment costs vary depending on a fund’s expense ratio and exit load.|
Cryptocurrency vs Mutual Funds: Which One to Opt for?
Investors should be aware that there is a higher risk with cryptocurrency. There are chances of higher returns as well as sudden losses. Also, crypto is not regulated, at least as of the beginning of 2022. However, mutual funds are not as high-risk in nature as digital currencies. These investment tools are significantly safer as opposed to cryptos. Even a mutual fund with high risk is relatively safe compared to cryptocurrencies.
Mutual funds are governed and regulated by the laws of the country. But digital currencies do not fall under the ambit of any legal system. Crypto coins offer extensive anonymity making it challenging to know who the owner of a wallet is or what their credentials are. This may lead to major scams. These coins are also susceptible to hacking and other cybercrimes.
Mutual funds are tangible investments as their value depends on their underlying assets. However, only one factor- the market performance of underlying assets affect their prices. On the other hand, cryptocurrencies derive their value from speculation, which impacts their prices.
The sections mentioned above provide a clear picture regarding the most suitable investment option between cryptos and mutual funds. Investors should know what they are doing before investing in cryptocurrencies, as they are the riskiest investments.
On the other hand, even new or inexperienced investors can invest via mutual funds. However, they should carefully assess various factors such as their risk appetite, financial goals and others before making an investment.