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Gold or Mutual Funds?

  • Dipika Jaikishan
  • Jan 12 2022
  • 8 minutes
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Gold has always been a preferred investment choice for most investors in India. However, gold investment is often driven by sentimental choices rather than being considered as an investment for maximising returns. In India, gold is a passive investment kept aside as an asset for use during unforeseen situations.

Over the last few years, gold has seen a significant growth compared to asset classes, even as gold prices have declined in the market. Whether it is in the form of ornaments, gifts for weddings or savings for children’s future, gold is the go-to investment for most Indians. 

One of the questions often asked is whether gold is better than mutual funds or vice versa? Let’s have a look at the pros and cons of both investment forms before concluding on how to choose the right investment.

Gold investment pros and cons

With the recent influx of newer investment opportunities such as sovereign gold bonds, people have started looking at gold as an investment for generating better returns. Gold has started forming part of people’s investment portfolios to ensure appropriate diversification. This often results in a comparison of gold with other investment avenues, like mutual funds. 

Benefits of investing in gold

Here are some of the positives of gold investments:

  1. Different holding forms

Gold can be bought in different forms and sizes, including coins, bars, jewellery and various other ornament forms that are available. Gold mass is measured using carats. One can buy different quantities and carats of gold as per personal preference and feasibility.

  1. Tangible asset

Gold is a tangible asset, however, it is far easier to purchase gold as compared to other tangible assets such as real estate. An investor can visit a gold shop and purchase it. It can also be bought digitally. Many Indian investors prefer to invest in assets that have a ‘touch and feel’ factor attached. This is one of the reasons why gold is preferred.

  1. Easy liquidity

Gold is highly liquid. An investor can visit any jeweller shop and sell gold assets if required. Different online platforms have certain rules for sale of gold, but one can still sell the investment to fetch liquid cash in return. But gold held with you may not fetch the same amount due to various reasons like levy of wastage charges, melting charges, etc

  1. No technical research required

To buy gold, one can check the daily value and buy/sell as per personal financial considerations. There is no requirement of research of the commodity on part of the investor. However, an investor must do certain minimal checks as far as the authenticity of the gold is concerned.

Disadvantages of gold investments

Some of the aspects to note before investing in gold are:

  1. Cost

The initial cost of gold investment can be very high, depending on the quantity, and quality purchased. Digital gold can be bought at as low as Re. 1, depending on the online platform chosen. Physical gold has certain making charges, usually around 10% of the total value. Making charges adds to the cost of gold, since these cannot be redeemed for cash. This can result in a loss, especially if the selling price is not high enough.

  1. Returns

Gold investment does not pay any dividends or extra returns as compared to mutual funds. However, one can track the gold price movements and sell it at a higher price to get profits from the investment.

  1. Risks attached

Although digital gold does not carry high risks, physical gold comes with the risk of storage, loss arising due to theft, damage, etc.

Mutual fund investment pros and cons

Mutual funds offer exposure to bonds and equities apart from various other financial instruments. Mutual fund managers are responsible for decision making with regards to the financial assets to invest in. These are pooled investment vehicles and are mainly used by investors for portfolio diversification. 

Benefits of investing in mutual funds

Let’s take a look at the pros and cons of investing in mutual funds.

  1. Professionally managed

Mutual fund portfolios are managed by experienced industry professionals or fund managers. They use years of knowledge and expertise to select the best stocks and bonds, along with other financial instruments in the portfolio. This makes mutual fund investments ideal for new investors since there is minimum work involved as far as portfolio decision making is concerned. 

  1. Diversification 

Mutual fund schemes invest across various asset classes, like equities, bonds, government securities, commodities, cash, gold, etc. The idea is to achieve diversification to maximise returns for investors.

  1. Minimal initial investment

As compared to physical gold, mutual funds require a low initial investment. With the help of SIP or systematic investment plan, an investor can begin investing in mutual funds with as little as Rs. 100.

  1. Liquidity

Most mutual fund investments can be easily liquidated in case of an emergency situation faced by an investor. It may take 24-48 hours before the funds are credited to an investor’s account.

  1. Caters to various financial goals

With a variety of mutual fund options available in the market, such as, equity linked savings scheme (ELSS) for tax-saving, liquid or ultra short-term funds for short-term goals, equity funds for long-term goals, an investor can pick one that fits personal financial requirements.

  1. Tax efficiency

ELSS schemes offer tax benefits under section 80C, allowing investors to invest up to Rs. 1.5 lakhs to claim tax deductions thereafter. Just as seasoned investors, millennials too prefer this mutual fund option to save tax and earn compounding returns in the long run.

  1. Low Cost

Mutual fund costs mainly come from the expense ratios. Various categories, like equity, debt and hybrid funds, have different expense ratios. Expense ratio can go up to 2.25% in certain cases. However, the overall cost is still lower than gold investments.

Things to consider before investing in mutual funds

Mutual funds expose investors to market risks since they are linked to different asset classes, like equities and bonds. In the short term, equity funds are riskier and often more volatile as compared to debt funds. Therefore, investors must consider equity funds for long-term investment.

Gold vs mutual fund: which one to choose?

Investing in gold vs mutual funds should be weighed in terms of how long to stay invested in which investment form. Here are some factors which can help investors choose between the two options:

  • Predicting performance: It is difficult to predict whether gold will perform better than mutual funds in the future. Often, equities and gold performance is in opposite directions. When one gives positive returns, the other’s performance dips. Since mutual funds adopt diversification most of the times, we cannot generalise its future performance expectations. 
  • Gold returns can be volatile too: Many geopolitical issues, domestic and global macroeconomic situations, interest rate movements are factors that have a significant impact on gold performance. Hence, an investor must review individual financial goals and objectives against the investment choice. Instead of chasing returns, one must focus on personal goals.

Gold can work for both short- and long-term goals, but it has to be constantly monitored for price movements. This can help investors in deciding on redemption of investment.

Mutual funds, on the other hand, can serve many financial needs. Equity funds can help in catering to longer period goals, whereas debt funds can be used for short term as well as long-term goals. Investors must carefully consider these points before concluding with investment decisions. 


It would be unfair to pick either gold or mutual funds since both of these investments, when combined within a portfolio, can enhance the diversification aspect. Choose between the two or both by considering individual financial goals, investment time horizon, risk appetite, and cost factors. 


  1. Why are gold mutual funds better than buying gold?

Gold mutual funds can be bought at a minimum amount of as low as Rs. 500 or as prescribed in the scheme. Investors who are looking to make a regular investment instead of a lump-sum investment can opt for gold funds as compared to buying gold.

  1. Do mutual funds invest in gold?

Gold mutual funds invest in gold bullions instead of directly in physical gold. They also invest in gold securities.

  1. How can I invest in mutual funds?

To invest in mutual funds, one can download the Finity app on the smartphone and experience a seamless investment process. The app gives access to a wide variety of mutual fund schemes that can be selected as per individual risk-return profile.

  1. Do mutual funds attract more tax than gold?

Mutual fund profits are taxed in the same way as profits from gold. Both returns are categorised into short term and long-term and taxed accordingly.

  1. Which is the best mutual fund for beginners?

New investors can consider investing in mid-cap or large-cap equity funds since these involve lower risk as compared to other fund types. 

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