Learn the difference between gold, mutual funds, and gold ETFs. know how the investment and ROI differ for each investment vehicle who should invest and how
Gold Vs Mutual Funds
When it comes to investment gold and mutual funds are some of the best investment vehicles. Gold has been a preferred choice of investment for Indians for more than a century. In most cases it is also seen as a suitable investment vehicle for long term generation wealth creation. On the other hand, mutual funds powered with SIP helps investors with lower risk and better returns in the long term. But should you buy gold or invest in mutual funds? To resolve this dilemma it is crucial to know the nuances of both the investments. Know the complete details of Gold Vs Mutual Funds
Primary Difference Between Gold and Mutual Fund Investments
| Basis of Difference | Gold | Mutual Fund |
| Meaning | Gold is a precious metal found in nature, mined, and purified for commercial use and jewelry. | An investment instrument offering diversification through a basket of securities (equity and debt). |
| Types | Physical and Digital Gold | Equity, Debt, Hybrid, and Gold |
| Options | Physical Gold: Bullions, jewelry, gold monetisation scheme. Digital Gold: Gold Mutual Funds, ETFs, Sovereign Gold Bonds |
Equity: Large-cap, mid-cap, small-cap, multi-cap, value funds, etc. Debt: Liquid, ultra-short-term, credit risk funds, etc. Mode of Investment: Regular Plan and Direct Plan Mode of Management: Actively Managed Funds and Passively Managed Funds |
| Initial Investment | Investing in physical gold can cost thousands of rupees, while digital gold can start with as low as ₹100. | Investing in mutual funds can be done through a lump sum or SIP route, starting with as low as ₹500. |
| How to Invest? | Invest in physical gold (commodity), gold money mutual fund, gold exchange-traded fund, or sovereign gold bond. | Invest in mutual funds by completing e-KYC, without needing a demat account. Purchase fund units through online platforms, distributors, and asset management companies. |
| Benefits | Provides stable returns over the long term. Sovereign gold bonds pay interest. No additional benefit for other gold investments. | Entitled to receive dividends when corporations declare them. Can benefit from market fluctuations. Riskier but can generate greater returns. |
| Fees | Gold investing generally incurs minimal expenses. Gold ETFs and mutual funds have an expense ratio. Making charges for gold jewellery. | Actively and passively managed mutual funds have management fees, with actively managed funds having higher fees. |
| Liquidity | Highly liquid. | Highly liquid, mutual fund investments can be liquidated within 2 to 3 days. |
| Returns | Gold yields returns of up to 10% – 13% p.a. in the long run. | Mutual fund returns vary by type, historically generating returns of 10% – 12% annually, with some funds achieving 15% – 18% returns. ( not guarantee) |
| Risk | Gold is one of the least risky assets. | Mutual funds are market-linked instruments, riskier than gold. Less volatile than direct stock market investments due to professional management. |
| Performance During Market Turmoil | Gold performs well during crises, as investors seek safer investments, increasing gold’s value. | During market turmoil, mutual fund NAV may decline, but it recovers with market corrections, allowing returns. |
| Involvement | Gold investments are typically long-term and do not require constant monitoring. | Mutual fund managers professionally manage investments. Monitoring markets is essential due to market-linked nature. |
| Diversification | Gold investments aid in portfolio diversification and hedge against inflation. | Mutual funds inherently offer diversification by investing in a basket of securities. Holding 2-3 funds provides excellent portfolio diversification. |
| Compounding | Gold investments do not offer compounding benefits, as gold doesn’t yield interest or dividends. | Mutual funds, especially ‘Growth Funds,’ offer compounding benefits in the long run. |
| Tax Benefits | Except for sovereign gold bonds and gold monetisation schemes, gold investments typically do not offer tax benefits. | Equity Linked Savings Schemes (ELSS) funds are the only type of mutual funds eligible for tax deductions under Section 80C of the Income Tax Act, 1961. |
Since the primary aspects are covered now let’s move on to the crucial part
Who Should Invest in Gold
Here is the thumb rule:
- If you have a very low risk appetite, that is, you don’t want to take more risk
- You are not expecting any exponential returns
- You are looking out for an asset that can be quickly liquidated
- If you are planning for an investment that can hedge against inflation
Then you can invest in gold. Also it is a physical asset that can be turned into gold jewelry, coins, biscuits and in the bank. Make sure to check the purity of the gold before investing in it and look out for a BIS certificate. Since gold value is universally recognised, it is an excellent investment that has better potential to appreciate in the future.
Who Should Invest in Mutual Funds
- If you are looking forward diversifying your investment
- You are ready to invest in both equity and debt
- You need professionals support to manage your investment
- If you are expecting significant returns in the long term
- You have a moderate to high tolerance for risk
Then you can invest in mutual funds. Picking up a long term debt fund or hybrid fund will definitely be beneficial in the longer run. You can also try out by investing in ultra short term funds. If you are an investor looking for something having both the benefits then gold ETFs are the best options.
Gold Mutual Funds or Gold ETFs
Gold ETFs are simple investment tools that track the price of pure 99.5% gold. Each unit of a Gold ETF represents 1 gram of gold. These ETFs blend the features of mutual funds and stocks. They are like mutual funds in management but can be traded on the stock market like stocks. Gold ETFs follow a gold index, aiming to mimic its returns. To invest in a Gold ETF, you need a Demat account.
A Gold Mutual Fund, also known as a Gold Fund, is an open-ended mutual fund that invests in units of Gold ETFs. It shares the same goal as Gold ETFs: investing in high-purity gold to generate returns. A fund manager oversees the buying and selling of assets based on the fund’s objectives.
| Did You know: Gold Exchange Traded Funds (ETFs) made their debut in Australia back in 2003 with the introduction of the ‘Gold Bullion Security’. Following this success, several countries, including India, have also introduced Gold ETFs. In India, the pioneer in this regard was Gold BeES, which was launched in February 2007. |
It’s important to note that Gold Mutual Funds only invest in gold through Gold ETFs and not directly in gold-related companies’ stocks. These funds belong to the thematic category according to SEBI and should not be confused with the Gold Mutual Funds discussed earlier. Your choice between the two will depend on whether you prefer gold price fluctuations or company-specific factors to influence your investment returns.
| Disclaimer: The blog is just for informational purposes and does not suggest or support investment of any kind. Remember mutual funds are subject to market risks. It’s paramount to consult investment experts before making investments. Vakilsearch does not endorse and does not recommend making investments to the readers. |
Conclusion
In the gold vs. mutual funds debate, there is no one-size-fits-all answer. Your choice should align with your financial goals, risk tolerance, and investment horizon. Consider your investment objectives carefully and consult with a financial advisor from Vakilsearch. Diversifying your portfolio with a mix of both gold and mutual funds can also be a prudent strategy.
When it comes to managing your investments and taxes, Vakilsearch offers services tailored to stock traders and mutual fund investors. We can assist you with easy ITR filing and provide expert guidance to optimize your financial journey. Make informed choices and secure your financial future with Vakilsearch.
FAQs
Can I achieve diversification by investing in gold alone, or do mutual funds offer better diversification opportunities?
Mutual funds typically offer broader diversification across various assets, while investing solely in gold may lack the same level of diversification.
What factors should I consider when deciding between gold and mutual funds for long-term wealth creation?
Your investment goals, risk tolerance, and time horizon should guide your decision. Gold suits those seeking stability, while mutual funds are better for long-term growth.
Are there any tax implications or costs I should be aware of when choosing between these two investment options?
Both gold and mutual funds have tax implications, and mutual funds may incur management fees. It's important to consider these factors when making your choice. Consulting with a financial advisor is advisable for personalised guidance.
How do the risks associated with gold investment differ from those of mutual funds?
Gold carries the risk of price volatility and doesn't provide income, whereas mutual funds are subject to market fluctuations and may charge management fees.
What are the key advantages of investing in gold compared to mutual funds?
Gold is often considered a hedge against inflation and economic uncertainty, while mutual funds offer diversified portfolios with growth potential and income generation.
Also, Read:
