The ever-time symbol of wealth, security, and financial stability- Gold. In India, it has been a tradition to buy gold, especially during auspicious days, as it has always been considered a trusted investment. However, with the passing of time, gold can now be bought in several different ways, one such being gold mutual funds. And this makes us think, in the present world, is buying physical gold beneficial or going for a mutual fund? So let’s understand each of them in detail and their pros and cons, to get a clear picture of which one is the most suitable for you, according to your risk appetite and return expectations.
Physical Gold
Gold in the tangible form has always been of great importance in Indian communities. This is because of the sense of financial protection Indian families have felt for generations. And it goes deeper into the roots, as it is often linked to traditions and festivals.
- Pros of Physical Gold
- Tangible assets: Having a physical form gives more sense of security to some individuals, as it is something you can see and touch.
- No counterparty risk: As physical gold can be sold to anyone, there is no dependency on a third-party institution, hence reducing default risk.
- High Liquidity: As gold can be sold or even pledged for a loan at any bank, jewellery shop, or any other financial institution in the market.
- Cons of Physical Gold
- Storage and Security: Storing a valuable asset like gold at home is very risky and will sometimes require additional costs such as bank locker fees and home safes
- Making and wastage charges: When gold is bought in its physical form, you have to pay additionally for the making charges.
- Purity Concerns: The purity of physical gold cannot be trusted completely unless bought from a certified or trusted source.
- Comparative lesser returns: Physical gold just provides capital appreciation, and does not provide returns such as interest or dividends.
Gold Mutual Funds (MFs)
When MFs invest mainly in Gold ETFs (Exchange Traded Funds, which basically track real gold value itself), they are called Gold Mutual Funds. To buy these kinds of MFs, you do not require a DEMAT account, as you can invest in them via a regular mutual fund account.
- Pros of Gold Mutual Funds
- No Issue with Storage: MFs do not come I physical form, they are digital investments, bringing no security risks with it.
- Accessibility: The buying and selling of gold MFs can be done smoothly with minimal paperwork required.
- Purity Assurance: As these MFs invest in 99.5% gold, we can expect full assurance regarding the purity of gold.
- Systematic Investment Option (SIP) Plans: Gold MFs also allow you to invest in them using SIP plans, which promotes disciplined investing even with a smaller amount of money.
- Tax Benefits: The taxable amount on Gold MFs is much lower when it is held for long term, as you are taxed only 20% with indentation.
- Cons of Gold Mutual Funds
- Expense Ratio: These MFs come with a small expense ratio (generally around .5% to 1%), and this can affect the net returns value.
- Market Risks: MFs in general are affected by market fluctuations, and this risk is even present in gold MFs.
- No Physical Possession: Some people prefer to buy gold only in its physical form, and this cannot be achieved by gold MFs.
| Comparative Analysis | ||
| Features | Physical Gold | Gold Mutual Funds |
| Form | Jewellery, coins, bars | Digital (Units of fund) |
| Storage | Requires physical storage | No storage required |
| Safety | Risk of theft or loss | Secure and regulated |
| Purity Concerns | Depends on source | Invests in 99.5% pure gold |
| Liquidity | Can be sold easily, but at a lower value | Easy online redemption at market value |
| Costs Involved | Making charges, storage costs | Expense ratio |
| Taxation | LTCG taxed after 3 years @ 20% + indexation | Same as physical gold |
| SIP Facility | Not available | Available |
| Returns | Linked to gold price; slightly lower due to costs | Directly linked to the gold price |
Also read: Loan Against Mutual Funds: Should You Choose Equity or Debt Funds?
Which One is Better for You?
If you are an individual who wants gold to have its physical form, values your tradition of gold, and plans on using it as jewellery, then physical gold is your way to invest in gold. But make sure you buy gold with its hallmark and from trusted and reputable sellers in order to have authentic resale value. On the other hand, if you are someone with the financial goal of capital appreciation or diversification, then gold MFs are your alternative. As they become part of your financial portfolio, rather than using them as jewellery.
The Bottom Line
In today’s fast-paced digital world, gold MFs stand as a better alternative when compared to physical gold in most of the parameters, such as safety, convenience, and cost efficiency. But again, if you are someone for whom gold holds traditional significance, then it’s better to split your investment accordingly by inculcating gold MFs along with a portion of physical gold, as this would offer you the best of both worlds.
Additionally, both act as an excellent hedge against inflation and market volatility, but the end choice on what to invest should be on you, and according to your financial goals. To summarize it once again, for long-term, safety and efficient investment, gold MFs are the go-to option, while if the financial goals are for short-term uses, emotional or gifting purposes, then physical gold is the best alternative.
Written by Adithya Menon
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