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Should You Buy Gold or Invest in Mutual Funds : A Comparative Analysis

13 January 2022

Customary gold investment and modern mutual fund investment; both are rewarding, but which one is more beneficial? Before comparing, let’s get a basic understanding of the two.

Gold

Gold has been a preferred choice of investment for Indians for centuries. Gold is not just an investment, but it also has sentimental value.  Indian families usually refrain from selling the gold purchased as an investment, as it signifies long-term generational wealth creation. Gold has been used as currency for years before paper money came into the picture. Even though gold is a conventional source of investment, it still can beat modern-day instruments because of its value.

Mutual Funds

Mutual funds are funds managed by professional managers where an Asset Management Company (AMC) pools the funds from small investors to invest in stocks, bonds, and other assets. In recent times, investments in mutual funds have grown, mainly because of their many benefits. Diversification of portfolio, varied options, expertise in managing the fund, and most importantly, the benefit of compounding has made mutual funds a popular investment avenue, especially for novice investors.

Gold vs. Mutual Funds – A Comparative Study

Parameters Gold Mutual Funds

Returns

Gold has been consistently providing returns of up to 10%-13% p.a. in the long run. Returns of mutual funds vary among different plans. However, considering the index as the base, mutual funds have delivered around 10%-12% returns p.a. Few funds have even gone to the extent of providing returns of up to 15%-18% per annum.

Risk

Gold is among the lowest risk-bearing assets. Most mutual funds invest in the stock market, which makes them riskier than gold investments. However, they are not as risky as direct stock market investments as they are professionally managed by expert fund managers.

Liquidity

Gold is a highly liquid instrument as one just has to go to the nearest jeweler to get the gold converted into cash. Even Digital Gold can be easily converted into cash (except for sovereign gold bonds). Most mutual funds are open-ended schemes, meaning that they can be sold easily on the stock exchange.

Performance during Crisis (E.g., Covid)

Gold has shown record performance during the crisis. Usually, in a crisis, the stock market takes a dip, and therefore, investors look for safer options to invest in. Therefore, they invest in gold, and as the demand for gold increases, its value starts increasing. During the crisis, as the stock market takes a dip, the NAV of the mutual funds also falls, thereby reducing the value of the investors’ portfolio. However, this is temporary in most cases because when the market enters correction, the fund recovers the value lost and starts providing returns.

Options

Physical Gold:

  • Bullions
  • Jewelleries
  • Gold Monetization Scheme

 

Digital Gold:

  • Gold mutual funds
  • Gold ETFs
  • Sovereign Gold Bonds
Company Preference:

  • Large-cap
  • Mid-cap
  • Small-cap
  • Multicap, etc.

 

Mode of investment:

  • Direct Plan
  • Regular Plan

 

Mode of operation:

  • Actively managed
  • Passively managed

 

Choice of instrument:

  • Equity
  • Debt
  • Hybrid
  • Gold etc.

Tax Benefits

Barring sovereign gold bonds and a gold monetization scheme, investment in gold does not usually come with tax benefits. Investors can invest in tax saver funds to save taxes.

Compounding

Gold does not provide a compounding benefit as it does not yield dividends or interest to its investors, which can be reinvested. Mutual funds are one of the best sources of investment when it comes to compounding. Investing in ‘Growth Funds’ provides the best fruits of compounding in the long run.

Diversification

Gold can be used to diversify your portfolio. A mutual fund is inherently a diversification tool. A single mutual fund invests in a gamut of companies which in itself diversifies a portfolio. Holding 2-3 funds provides great diversification benefits.

Initial Investment

While investing in physical gold may require thousands of rupees, investing in Digital Gold can be started with an amount as low as Rs. 100. Investments in mutual funds can be started with just Rs. 100.

 

Key Takeaways

  • An investor’s portfolio should be diversified using both gold and mutual funds.
  • Investors should refrain from making investment decisions emotionally during a crisis. The long-term effects should be taken into consideration as the stock market always enters the correction, however low or high it may go.
  • If gold is purchased with the sole motto of investment, bullions or gold biscuits should be preferred over jewelry, as jewelry involves making and labor charges of up to 10%-20% of the gold value.

FAQs

Q: What are the tax benefits on Sovereign Gold Bonds (SGB) and Gold Monetization Scheme (GMS)?

A: In SGB, interest income is taxable, but capital gains are exempt. In GMS, both interest income and capital gains are exempt.

Q: What is preferable, Physical Gold or Digital Gold?

A: If possible, an investor should prefer Digital Gold as it eliminates the possibility of theft and saves on bank locker rent charges.

Q: Which is better- active mutual funds or passive mutual funds?

A: Active mutual funds are actively managed by the fund manager. Passive mutual funds track the performance of a particular index. A portfolio should have a combination of both active and passive mutual funds.

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