Gold vs mutual funds as investment options – it is a debate that is slowly gaining denomination. While gold represents the ‘old school’ of investment thoughts, mutual funds find favor with the modern generation. However, with the stock market bloodbath that prevailed over the last couple of years, investors are suddenly rediscovering the virtues of investing in gold. This is not to mean that mutual funds have lost their charm, or potential as an efficient and effective investment option. When comparing gold with mutual funds as investment options, it is pertinent to note the benefits and weaknesses of each option individually.
Gold vs Mutual Funds Investment
Gold has retained its value as a safe and trusted store of value from times immemorial. The sheen of gold as a credible investment is not going to diminish anytime soon. On the other hand, savvy investors are also exploring mutual funds in a bid to get greater returns. In brief, an investment in gold vs mutual funds can be compared on the following criteria -
- Ease of Availability- If you have the money to spend, both the options are easily available. Gold can be purchased from any shop, while mutual funds are rather limited in their distribution. You can purchase mutual funds online,while gold can also be bought online, in the form of jewelry.
- Documentation - No documentation is needed to purchase gold, while the purchase of mutual funds will always leave a paper trail. To put it rather crudely, you can use “black money” to buy gold, you cannot invest black money in mutual funds.
- Intermediary/Broker – For buying gold, no intermediary is needed, you can go to a shop, and purchase it yourself. For mutual fund, you will need an intermediary, whether it be your personal bank, or your friendly neighborhood investment broker.
- Transferability - Gold is freely transferable, that is, you can gift it, bequeath it and sell it freely, again without documentation and intermediaries. The transferability of mutual funds is very limited, and done through intermediaries and paperwork.
- Market Analysis – You don’t need to do even a cursory market analysis to make a decision for investing in gold; even a “financially ignorant” person can make a buying decision. To make a correct mutual fund investment decision, some degree of market knowledge is desirable.
- Future Outlook – The supply of gold is only going to decrease in the future, and any decrease in demand is not foreseen. In fact, the demand for gold is only going to increase. Simple economics will tell you that decrease in supply plus an increase in demand equals higher prices. On the other hand, the supply of mutual fund options is not constrained by any natural factor.
- Market Fluctuations - The underlying value of gold may fluctuate slightly, but it can never become worthless. It is one of the best ways to preserve wealth. Conversely, the value of mutual funds may fluctuate widely, and may decrease well below its purchase price.
The above mentioned points seem to indicate that investment in gold is better than an investment in mutual funds. But that would be oversimplification, the actual decision on investments has to take in many other factors in consideration. The risk profile of the individual, the investment objective, the existing investment portfolio etc, are the factors that should be considered.
To put things in proper perspective, it would be proper to point out a few shortcomings of investing in gold -
- Do not expect high returns.
- Gold just preserves your capital, it does nothing to grow it. The value of investments in gold increase due to the increase in price of the underlying asset.
- Storage and safekeeping of gold is a big issue.
- Carrying and transporting of gold is also a risky activity.
- In case of misplacement/theft, your capital is as good as destroyed.
- to get the best return from gold, you should chose wisely as to what form of gold you would invest in – whether jewelry, coins or bullion.
A final decision regarding whether it is better to invest in gold or mutual funds should be made only after considering all the relevant points. The best way, of course, is to have a proper mix, and spread your overall investments in various instruments, including gold and mutual funds.