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Investing in gold in India is different from investing in gold in other countries. No, we don’t mean that the gold is more valuable here. In India, people attach a lot of sentimental value with gold.

They either keep it as ornaments for themselves, use it as gifts in weddings or start saving for their children’s marriage in gold when the child is a toddler. Certainly things have changed with passing years.

So a decision to invest in gold does not always have an investment value but a sentiment quotient attached to it too.

However, with the influx of newer opportunities like sovereign gold bonds by the government and digital gold, people have started valuing the investment value in gold as well.

It is natural and even prudent for an investor to wonder if a particular asset is better than others. Like this case. You may be wondering should you invest in gold or mutual funds?

Investing in gold vs mutual funds is not an either-or situation. To maintain a healthy diversified portfolio, you need to have your hands on maximum asset classes in the right proportion, in-line with your investment objectives and risks.

The best way to decide is to carefully weigh your risks and goals and see which is the best option for you.

Let’s look at the different pros and cons of investing in gold vs mutual funds.

Investing In Gold

Pros

1. Varying forms

Gold itself can be bought in various forms and sizes. Gold can be bought in coins, bars, chains and bangles and the various kinds of gold ornaments that are available.

It can be bought in different sizes and there are different carats (metric unit used to measure mass in gold) of gold available so you can see which suits you best according to your finances.

2. Tangible Asset

Gold is one of the few assets that is tangible. Purchasing gold is much easier compared to purchasing other tangible assets such as real estate. Physically you can walk into any shop and purchase it and digitally, gold is just one click away.

The fact that this investment has a ‘touch and feel’ aspect attached to it, it goes well with many Indian investors.

3. High Liquidity

Gold is highly liquid. If you have physical gold, you can walk into any jeweller shop and sell your gold.

Virtually, different platforms have different rules but you still get an early redemption on your investment if you do not want physical gold on delivery but only the money value.

4. Does not need technical research

With gold, you can just check the daily value of the commodity and buy/sell in accordance with your finances. You do not have to research into the commodity itself. However, you do need to do minimal checks on the authenticity of the jeweller and his/her business in case of physical gold just to prevent yourself from getting duped.

Cons

1. Costs and charges

As on April 24th, 10 grams of 24 carat gold cost Rs 43,430. The initial cost of investing in gold is very high. So the initial investment cost to buy a small quantity of this commodity is high, as evident.

When it comes to digital gold, some platforms allow you to invest as low as Re 1 as well.

Also when it comes to physical gold, the making charges can go as high as 10% as well of the total value. Making charges are not redeemable for money when you sell your gold back and you lose out on that amount.

It will turn out to be a loss if the selling price is not high enough and does not cover for the making charges,

2. Returns

Unlike mutual funds or stocks investments, investment in gold does not pay any dividends or any sort of extra returns. However, you can track the gold price regularly and sell it a higher price than you bought to get some extra value on your investment.

3. Risks Involved

While digital gold does not carry as many risks, physical gold carries the risk of storage, loss due to theft, breakage, damage to the jewellery and more.

Investing In Mutual Funds

Mutual funds are a great way to stay invested in bonds and equities. There is a fund manager that takes care of decision making to see which equities or government securities to invest in. They are pooled investment vehicles. Mutual funds are the best way to keep your investment portfolio diversified.

Let’s take a look at the pros and cons of investing in mutual funds.

Pros

1. Professional Portfolio Management

The portfolio of a mutual fund investor is managed by experienced industry professionals also known as fund managers. As mentioned before, they use their expertise and knowledge of the industry to pick the best selection of stocks and bonds for your portfolio.

You do have to do the minimum work of deciding which kind of mutual fund works for you after which your fund manager will take over.

2. Diversification 

Mutual fund plans invest in different asset classes: equities, bonds, government securities, commodities, cash and even gold. The main premise of the art of investment, which is diversification, gets covered in mutual funds.

3. Low initial investment

As opposed to gold, which is the other asset class in question in this article, mutual funds have a low initial investment. Initial investment into physical gold can go up to multiples of Rs 10,000 while mutual funds can be accessed at Rs 500 as well.

4. Liquidity

Mutual funds investments are also liquid but if you compare it to gold, then the latter is more liquid. You can get instant cash for your gold investments. However in mutual funds as well, after you ask for redemption, the system may take 24 to 48 hours to transfer the money back into your account.

5. Can serve your financial goals

There is a variety of mutual funds available in the market: equity linked savings scheme (ELSS) for tax saving purposes, liquid or ultra short term funds for your short term goals, equity funds for your long term goals and so on and so forth.

The degree of diversification in mutual funds allows you to serve different life goals.

6. Tax efficiency

ELSS schemes come under section 80 (C) which allow you to invest up to Rs 1.5 lakh and claim tax deductions thereafter. This is one of the most popular mutual funds among millennials and even experienced investors who want to save tax and earn compounding returns as well.

7. Low Cost

Costs involved in mutual fund investment are the expense ratios. Across categories (equity, debt and hybrid funds) expense ratios do not cross 2.25% of your whole investment which is lower than gold in many instances.

Cons

1. Market risk

Mutual funds carry the market risk because they are linked to asset classes like equities and bonds. Equity funds are riskier and more volatile than debt funds. However if held for longer durations, say 7 to 10 years, the law of compounding helps you to earn high returns on mutual funds.

2. Research

Even though there is a fund manager to do the research for you, you still need to do minimal research of all the funds available in the market provided by a range of asset management companies (AMCs). You need to see which fund and which AMC suits you best.

Tabulated below is a comparative analysis of gold vs mutual funds in India, that can help you choose your pick.

Sr. No.ParticularsMutual FundsGold
1.Initial investment costCan invest in an SIP for as low as Rs 500.Physical Gold: Initial invest can run up to a few 10,000s.
Digital Gold: Can be as low as Re 1 as well
2. LiquidLess liquid than gold More liquid than mutual funds
3.Tax savingUp to Rs 1.5 lakh in ELSS schemesNone
4. DiversificationHigherMaximum you can diversify is into different forms of gold but that sort of diversification will not serve any purpose
5.ReturnsIn form of dividends; also by tracking the funds, you can sell at a higher price than your purchase cost You can only get a value on your investment by selling at a higher value than your purchase cost
6.RiskMarket riskMarket risk; also risk of theft and loss in case of physical gold
7.Costs and chargesExpense ratios: up to 2.25%Making charges can be as high as 10% of the initial investment for physical gold.

Here’s how both the investments have performed in the last few years.

Annual Returns
Category20192018201720162015201420132012
Equity: Large Cap10.531.130.923.71-1.0636.186.9529.16
Equity: Mid Cap2.77-12.1643.154.88.7673.114.6941.59
Equity: Small Cap-1.51-18.6254.85.6110.3287.193.6641.6
Equity: ELSS8.26-6.3338.44.583.0350.316.431.42
Debt: Liquid6.336.886.47.538.258.979.1455.06
Commodities: Gold22.666.892.3410.87-8.29-4.2-10.7825.19
Data as on April 17, 2020
Source: Valueresearchonline.com

Gold vs mutual fund: Which One Should You Pick?

The decision to pick between investing in gold vs mutual funds investment is not to decide which is better than the other but to decide how much to stay invested on which side.

You cannot predict which investment: gold or mutual funds, will perform better. Many-a-times equities and gold stand on two ends of the curve: when one performs better, the other dips. This is not a standard rule but happens most of the time.

Also when it comes to mutual funds, the category cannot be seen on a generic note because mutual funds itself has a lot of diversification. Within mutual funds also there are equity and debt funds wherein equity returns are higher but volatile whereas debt fund returns are moderate but fixed.

Gold returns are also volatile like equity funds . The factors that impact both the categories are similar to an extent: geopolitical factors, domestic and global macroeconomic situation, interest rates among other factors.

Hence review your goals and objectives. Avoid chasing returns as you may end up being misled. Also they are both volatile. Any investment returning higher values during a particular period of time does not mean it is a ‘good’ investment.

Those may be cyclical gains. You may end up investing in equities or gold seeing the high returns but your risk appetite may be very low and may lose a lot of money when the market/commodity is under performing.

Gold may let you serve both short and long term goals but you will have to monitor the commodity’s price movements very closely to decide when you want to redeem your investment. However gold may not give you exceptional returns over a longer tenure and people choose to redeem in a shorter period.

There is uncertainty. When it comes to mutual funds, there are designated funds that serve your financial needs. For example: equity funds are to be kept for a longer period of time whereas debt funds have both long and short term funds.

Review these points and come to a conclusion regarding your investment. Nevertheless, as mentioned before as well, gold investments should not exceed more than 10% of your total investment. Do not choose one category (gold vs mutual funds)over another. Assess your investment profile before you channel your funds.

Happy Investing!

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