On 29th August, gold prices in India rose to a new high with 10 grams of 24-carat gold costing more than Rs. 40,000 in New Delhi. This sharp rise marks an increase of nearly 25% from Rs. 30,560 in 2018.
Consequently, investors are in a dilemma about where to invest.
It is natural and even prudent for an investor to wonder if a particular asset is better than others or not. The best way to decide is to carefully weigh the pros and cons of each and see which avenue gives you maximum return on investment, as well as best suits your investment objectives. Let us take a look at both the options.
In this article
Investing In Gold
With various innovations, gold trading has evolved from physical gold to virtual trading. However, all forms of gold are equally attractive for investments.There are various reasons why people, especially Indians, invest in gold to meet their financial goals.
Let’s look into various the pros and cons of investing in gold.
1. Cannot Go Bankrupt
For investing in gold, no paper contract is needed to make it whole. No middleman or other party is necessary to fulfill a contractual obligation.
That’s because gold is the only financial asset that is not simultaneously some other entity’s liability.
This is important because gold will be the last man standing when a crisis hits. That’s a powerful tool to have in your portfolio when things start to go wrong in your country or economy.
It also means gold won’t go to zero. It’s never happened in its 3,000+ year history. Gold will always have value. You can always sell it if you need currency.
2. Tangible Asset
Gold is one of the few assets that is tangible, and thus, it creates a perception of safety among investors. Purchasing gold is much easier compared to purchasing other tangible assets such as real estate.
Also, because of this feature, while assets stored digitally are prone to hacking and other misuses, gold is free from such concerns.
3. Highly Liquid
Gold is also ideal because it is easy to sell and can be carried in your pocket anywhere you go.
Gold is highly liquid. Virtually any jewelry dealer in the world will recognize gold and buy it from you. You can sell it to your local coin shop, a pawn shop, a private party or an online dealer. It can always be sold for cash or traded for goods.
4. Requires No Specialized Knowledge
No special skills, training or equipments are needed to buy or recognize gold. Buying gold is relatively straightforward.
5. Gold Is Money
Gold is not used as a currency today, but its role as money makes it superior to any currency.
In fact, gold has been money longer than any currency in history. Gold has been a store of value for at least 3,000 years, while one of the longest currencies in history, the British Pound Sterling, is about 1,200 years old.
6. Geopolitical Factors
Gold usually does well during geopolitical turmoil and the current crisis over Korea’s nuclear capability has boosted the prospects of the yellow metal.
Crises such as Trade wars between US-China, which have a negative impact on prices of most asset classes, have a positive impact on gold prices since the demand for gold goes up as a safe haven for parking funds.
1. Investment Cost
Taking the current cost of almost Rs. 40,000 per 10 grams, one needs to carefully think before making an initial investment in gold, considering the high cost to begin investing.
Unlike mutual funds or stocks investments, investment in gold does not pay any dividends.
3. Risk Involved
Physical carrying and storage of gold involves high risks of theft and burglary
Investing In Mutual Funds
Mutual funds are considered to be the most popular investment vehicle of the 21st century not only in India but around the globe.
Most of the investors invest in mutual funds in order to diversify their holdings and earn a maximum return. While it is true that mutual funds provide diversification, it is also important to determine the pros and cons of mutual funds before investing in them.
1. Professional Portfolio Management
The portfolio of a mutual fund investor is managed by experienced industry professionals, known as fund managers, who have expertise in this field. They constantly manage your portfolio in a way which will help you generate maximum return on your investments.
Mutual funds can invest in securities across various asset classes like stocks, bonds, commodities or cash. This helps in portfolio diversification.
This diversification does not depend on asset classes only, but sectors also. If one sector is not performing well, there is a high probability of other sectors compensating for the loss in a particular scheme.
Investing in mutual funds is very affordable as an individual can invest as low as Rs. 100 every month in through Systematic Investing Plan (SIP) mode. And there is no upper limit on the amount of money that can be invested.
So, even a small investor can participate in the stock market by investing in mutual funds.
Apart from Equity Linked Savings Schemes (ELSS), all it takes to exit from a mutual fund is one instruction to your broker/agent to sell it. The funds come back to your account in 48 hours.
5. Suit individual’s Financial Goals
There are several types of mutual funds available in India catering to investors from all walks of life. It is easy to find a mutual fund that matches your income, expenditures, investment goals, and risk appetite, that can help you achieve your financial objectives.
6. Tax efficiency
You can invest up to Rs. 1.5 lakhs in tax-saving mutual funds known as ELSS mentioned under 80C tax deductions.
1. Fees and Expenses
Mutual funds charge annual fees to their clients known as expense ratio irrespective of the fund’s performance. This can be defined as the cost of doing business.
Moreover, there is an exit load on mutual fund schemes, if the investor wishes to redeem the investment before a particular period of time.
But to minimize these expenses you can go for direct mutual funds.
2. Lock-in Clause
There are two types of mutual fund schemes – one which allows you to enter and exit any time, which is known as open-ended MF scheme and the other scheme comes with a lock-in period of 3 to 5 years, which is a closed-ended MF scheme.
And if an investor wishes to redeem the investment before this lock-in period, he/she needs to pay a certain amount as exit load.
Gold Vs Mutual Fund
The returns from gold funds offered by mutual fund houses have touched 27.65% in the 1 year ending August 29, outperforming equity and debt mutual fund categories.
Now let’s see these two asset class performance over the years.
1-year performance of Gold and Mutual fund schemes
|Investment Class||1-year returns||Initial amount||Final Amount|
|Gold investment||27.65%||Rs. 100000||Rs. 127650|
|Equity MF (Large Cap)||1.00%||Rs. 100000||Rs. 101000|
|Equity MF (Mid Cap)||-6.00%||Rs. 100000||Rs. 94000|
|Equity MF (Small Cap)||-12.00%||Rs. 100000||Rs. 88000|
|Debt MF||9.00%||Rs. 100000||Rs. 109000|
3-year performance of Gold and Mutual fund schemes
|Investment Class||3-year returns||Initial amount||Final Amount|
|Gold investment||7.40%||100000||Rs. 123883|
|Equity MF (Large Cap)||11.00%||100000||Rs. 136763|
|Equity MF (Mid Cap)||12.00%||100000||Rs. 140493|
|Equity MF (Small Cap)||10.00%||100000||Rs. 133100|
|Debt MF||8.00%||100000||Rs. 125971|
5-year performance of Gold and Mutual fund schemes
|Investment Class||5-year returns||Initial amount||Final Amount|
|Gold investment||5.80%||Rs. 100000||Rs. 132565|
|Equity MF (Large Cap)||12.00%||Rs. 100000||Rs. 176234|
|Equity MF (Mid Cap)||14.00%||Rs. 100000||Rs. 192541|
|Equity MF (Small Cap)||18.50%||Rs. 100000||Rs. 233664|
|Debt MF||9.00%||Rs. 100000||Rs. 153862|
15-year performance of Gold and Mutual fund schemes
Let’s now do a comparison of the last 15 years. Gold prices in India cost around Rs. 5,600 in 2004, while BSE Sensex was at the level of 4231.69.
At present, the value of 10-gram gold is around Rs 40,000 while Sensex is at around 37,500.
However, there is another investment segment that has even outperformed the BSE Sensex i.e, mutual funds.
|Investment Class||15-year returns||Initial amount||Final Amount|
|Gold investment||12.00%||Rs. 100000||547357|
|Equity MF (Large Cap)||14.00%||Rs. 100000||713794|
|Equity MF (Mid Cap)||17.00%||Rs. 100000||1053872|
|Equity MF (Small Cap)||20.00%||Rs. 100000||1540702|
|Debt MF||10.00%||Rs. 100000||417725|
Which One Should You Pick?
So after look into all the aspects of Gold investment and mutual fund investments, now the question arises which one is best suited for you?
I would suggest diversifying your portfolio with both. Why? because gold has a negative relationship with equity. In times of volatility or crisis in the stock markets, gold as an investment performs better than equity-oriented mutual funds.
However, if you have a long investment horizon, you may consider investing in equity-oriented mutual funds as these schemes have the potential to offer superior returns than other asset classes, including gold, over a long period. Remember, however, to choose your equity mutual funds, based on your risk appetite.
But for shorter investment horizon, Gold can be one of the best options given the current geopolitical scenario and Indian economic conditions.
Gold investment is worthwhile because it is an inflation-beating investment. Over a period of time, the return on gold investment is in line with the rate of inflation.
But remember that investing in physical gold like bars, jewelry, and coins, comes with issues like storage, security, and even liquidity. Further, what you earn solely depends on the increase and decrease of gold price.
One the other hand, by investing in mutual funds, you not only own a part of a company, but also, get benefits like dividends.
Also gold has a very strong negative relationship with stock markets, it makes sense to have some 5-10% exposure in gold ETFs or other investment products as a hedge.
To sum up, both options are the prime choices of investors looking for wealth creation. However, decide how much of your money needs to be allocated to each avenue, based on your investment goals, risk appetite as well as investment horizon.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.