Gold vs. Mutual Funds: What Should You Buy?
It is pretty natural, and well, even sensible for an investor in the market to wonder if one particular asset is any better than the others in the market or not. The best way to make this decision of what is better is to carefully weigh the advantages and disadvantages of each of the assets, and then see which of the investment avenues gives you the maximum return on investment, along with the avenue that suits your investment plans in the best manner.
In this thread, we are going to take a look at both – mutual funds and gold as investment options so that you can come to a decision regarding which avenue is the one that suits you the best.
Gold As Investment Plans
With numerous different innovations, the trading of gold has evolved from the physical form of gold to virtual trading. However, all of the forms of gold more or less are equally attractive to the investors. There are numerous reasons behind any investor making investment plans to choose gold as an investment avenue.
Below are the various pros and cons of investing in this avenue.
Pros of Investing in Gold
The following are the advantages of choosing gold as a part of your investment plans:
Won’t Go To Zero
For an investment in gold, there is no paper contract necessarily required to make it whole. There is no requirement of a middleman or any other party to fulfill a contract as an obligation. This is because gold is the only financial asset that is not at the same time some other entity’s liability.
This is extremely important because if a crisis is to hit, gold will be the last man standing. When you think about it, this is an extremely powerful tool that one is to have in the portfolio when things start to seem unpleasant in one’s country or the overall economy. This also means that gold will not go bankrupt, or to zero. It has never happened in its journey of over 3,000 years.
Gold always holds value and can be sold if you ever need currency.
Among the very few assets out there that fit the tangible basket, gold exists, thereby, creating a perception of security among the investors in the market. Buying gold is also extremely easier when compared to buying the other sorts of tangible assets, for example, real estate.
Additionally, due to this feature of this investment avenue, the assets that are stored digitally are exposed to a risk of being hacked and other misuses, gold does not have any such concerns.
This avenue is also ideal to hold in your portfolio because it is extremely easy to sell and you can carry it in your pocket wherever you go.
Gold is extremely liquid, virtually any dealer for jewelry across the globe will recognize and buy gold from you. You can sell gold in your local coin shop, to an online dear, or at a pawn shop. It can at all times be sold in return for cash or it can be traded for goods.
No Special Skill Are Required
There are no special skills or knowledge or sorts of training or types of equipment that are required to recognized and purchase gold. Purchasing gold is comparatively extremely straight forward.
Equivalent To Money
Gold is not used in the form of currency in today’s age, but its role in the form of money makes it superior to any currency out there. It has been, in fact, money longer as compared to any currency in history. It has been a form to store value for over 3,000 years.
Gold has usually proved to do well during any sort of geopolitical turmoil. Any crisis that tends to impact the price of most of the asset classes negatively, usually, have a positive impact on the prices of gold. This increases the demand for this yellow metal as it becomes a safe area to park their funds.
Cons of Investing in Gold
The following are the disadvantages of choosing gold as a part of your investment plans:
Cost of Investment
Considering the high costs involved in initially procuring this investment avenue, one needs to think carefully before coming to a decision.
Unlike other investment plans such as mutual funds or stocks, gold investment plans do not pay any dividends to the investors.
Physically carrying or storing gold involves high risk related to burglary or theft.
Mutual Funds As Investment Plans
Mutual funds are believed to be one of the most popular investment plans across the globe of the 21st century. Most of the investors invest in these plans to diversify their portfolio and at the same time to maximize their earnings.
While the fact that mutual funds provide diversification is true, it is equally important for an investor to determine the advantages and disadvantages associated with this investment avenue before going ahead and investing in them.
Pros of Investing in Mutual Funds
The following are the advantages of including mutual funds in your investment plans:
Portfolio Management By Professionals
The portfolio of an investor investing in mutual funds is managed by an experienced professional, who is also known as a fund manager. These fund managers have quite a lot of experience in these fields. They regularly manage your portfolio in such a manner that you receive maximized returns on your investments.
Diversification of Portfolio
Mutual funds help in achieving portfolio diversification by investing in securities across numerous asset classes such as bonds, stocks, cash or commodities. This diversification not only depends on the classes of the assets but also on the sectors. If one sector’s performance is not that well, there is a high chance that the other sectors’ performances will compensate for the losses incurred.
The cost of investing in mutual funds is quite affordable as an investor can start with minimal monthly investment amounts with the Systematic Investment Planning (SIP) route. And the best part is that there is no upper cap on the amount that can be invested. Therefore, even a small investor can take part in the stock market by mutual funds investments.
Generally, all that is required to exit from a mutual fund is to instruct your agent or broker to sell it and the funds come back to your account within roughly 48 hours.
Made To Suit An Investor’s Financial Goals
There are many types of mutual funds available in the market to cater to the requirements of the various investors. It is not a very tough task to find a mutual fund that suits your expenditures, income, investment plans, along with your risk appetite, that can help you in achieving your financial goals.
Cons of Investing in Mutual Funds
The following are the disadvantages of mutual funds as a part of your investment plans:
Fee and Expenses
Mutual funds are known to charge an annual fee to the investors that are known as expense ration, regardless of the performance of their fund. This can also be defined as the cost involved in doing business.
Furthermore, there is an exit load on mutual funds – if an investor wants to redeem an investment before a fixed period of time. But, if you wish to minimize these expenses, you can look out and opt for direct mutual funds.
Clause Regarding Lock-in Period
There are two kinds of mutual funds in the market – one allows you to enter and exit as you please (open-ended mutual funds) and the other that has a lock-in period ranging between 3 to 5 years (close-ended mutual funds). In the case of close-ended funds, if the investor wants to redeem the investment before the end of the lock-in period, there is a certain exit load that needs to be paid.
Which One Should You Choose?
So once you have looked at the important aspects of gold and mutual funds as investment plans the important question arises – which one should you invest in?
The ideal suggestion is to diversify your portfolio by holding both these investment avenues. The reason behind this is that gold has an inverse relationship with equity. In the situations of market volatility or stock market crisis, gold as an area for investment turns out to perform better as compared to the mutual funds that are equity-oriented.
If you are someone with long-term investment plans, you can consider mutual funds as an avenue for investment as the equity-based funds have the potential to offer higher returns as compared to the other asset classes over a longer tenure. While doing so, keep in mind to choose the asset class as per your appetite for risk.
Whereas, for short-term investment plans, gold can turn out to be one of the best options as per the current geopolitical scenario. Gold is a worthwhile avenue for inbestment as it has proved to be a hedge against inflation.
But always keep in mind, investing any form of physical gold comes with problems related to security, storage, and sometimes even liquidity. And what you earn depends solely on the increase or decrease in the price of gold.
On the other hand, mutual fund investments provide the investor with a part of the company as well as dividends.
To further conclude, both are options that are suitable for an investor seeking to create wealth. However, the decision for the amount of money to be allocated to each of these depends on your investment plans, risk appetite, and horizon for investment.