Should You Buy Gold Or Invest In Mutual Funds? A Comparative Analysis

Gold and mutual funds are popular investment options for those looking to grow their wealth. However, these investments have unique advantages and disadvantages, sometimes making it difficult for investors to choose which one to invest in. This blog post glances at a comparative analysis of gold vs. mutual funds to help you decide on whether to buy gold or invest in mutual funds.

Understanding gold

Gold is an expensive metal that has been traded as a currency for thousands of years. It is a popular investment option due to its ability to retain its value over time, particularly during economic uncertainty. Investors can buy physical gold in the form of gold bars, coins, or jewellery or invest in gold ETFs (Exchange Traded Funds), which are financial products that track the price of gold.

Understanding mutual funds

Mutual funds are investment products that draw money from several investors to invest in multiple assets, such as stocks, bonds and commodities. These investment products are managed by professionals who support cash on behalf of the investors. The returns generated by mutual funds are distributed among the investors based on their investment in the fund.

A comparative analysis for gold vs. mutual funds 

Let’s compare these two investments on some common parameters to make a comparative analysis.

Returns

Returns are the primary factor that investors consider when choosing an investment option. Mutual funds tend to perform better than gold, when it comes to returns. This is because mutual funds invest in a diverse range of assets, reducing the risk of losses due to poor performance of a single investment. On the other hand, the value of gold is affected by factors such as global demand, political stability, and the strength of the US dollar, making it more volatile than mutual funds.

In the past ten years, the average annual return on gold has been around 2.9% while the average annual return on mutual funds has been around 8.2% 

Also note that the returns of mutual funds are subject to market conditions and past performance does not indicate future results.

Liquidity

Liquidity means the ease with which you can convert an investment into cash. Regarding liquidity, mutual funds are better than gold. This is because mutual funds can be easily bought, sold and credited to the investor's bank account within a few days. On the other hand, selling physical gold can be time-consuming. Investors may have to wait for days or weeks to get a fair price.

In addition, selling physical gold may involve additional costs, such as shipping and insurance, which can reduce the overall return on investment.

Risk

All investments carry some measure of risk. Investors must understand the risks associated with an investment before investing their money. Gold is considered a safer investment option than mutual funds. Gold usually retains its value over time and is often commonly considered a haven during economic uncertainty.

On the other hand, mutual funds are subject to stock market risks and can be affected by factors such as inflation, interest rates and economic conditions. However, since mutual funds invest in a diverse range of assets, it reduces the risk of losses due to the poor performance of a single investment.

Cost

Cost is an essential factor to consider while choosing an investment option. In the context of cost, mutual funds trump gold. Gold is a physical asset. Buying and storing physical gold involves additional costs such as storage fees, insurance and transportation costs. Plus, the price of physical gold also includes a premium over the market price. This can reduce the overall return on investment.

On the other hand, mutual funds have lower costs as they do not involve any physical transactions or storage fees. The costs associated with mutual funds include the expense ratio, which is the fee charged by the fund manager for managing the fund. There are also  transaction costs, which are fees charged for buying and selling the assets in the fund.

Taxation

Taxation is an essential factor to consider when choosing an investment option. Mutual funds are more tax-efficient than gold. Mutual funds are subject to capital tax gains, which are applicable only when the investor sells the mutual fund units. In addition, mutual funds also provide tax-saving options such as ELSS (Equity-Linked Saving Scheme), which offers tax benefits under Section 80C of the Income Tax Act.

On the other hand, gold is subject to capital gains tax if the money investor sells the gold within three years of purchase. The tax rate is equal to the investor's income tax rate. In addition, physical gold is not eligible for any tax-saving benefits.

Which one should you choose?

After considering all the factors stated above, it is clear that mutual funds and gold have unique advantages and disadvantages. Therefore, choosing between the two depends on your investment goals, risk tolerance and investment horizon.

Mutual funds are a better alternative if you want a long-term investment option with higher returns that are not subject to the volatility of the gold market. However, mutual funds carry higher risks than gold, and investors must have the risk tolerance to withstand the risks associated with mutual funds.

Gold is considered a haven during economic uncertainty and protects against inflation. However, it carries lower returns, Though, if you are searching for a safe investment option that retains its value over time, gold is a better option.

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Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.