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Gold Vs Mutual Funds: Where Should You Invest? logo 10-08-2020 Adhil Shetty
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For Indians, gold has traditionally been the preferred investment option. Not only is it a hedging tool against uncertainty, the yellow metal is also believed to be an effective instrument for countering inflation. Indians have an emotional attachment with the precious metal which gives it a prized spot in their investment portfolios. However, over the years, another form of investing has gained tremendous popularity amongst investors: mutual funds (MFs). The prospect of impressive long-term returns, ease of investing, risk-mitigation tools such as SIPs, and tax-efficiency are the key features that have attracted investors to them.

Financial markets have been volatile in 2020. While both equity and debt mutual funds have seen violent price fluctuations, gold prices have zoomed to record highs due to high demand and global economic uncertainty. The yellow metal has risen nearly 60% from the beginning to 2018 to breach the Rs.50,000 mark recently. Experts predict that the uncertainties over Covid-19 could further boost the demand for gold and its price.

The question we’re asking is this: what should you buy? Should you be buying gold or mutual funds or something else? To answer this, I’d like to quote a personal finance editor and author. Answering the same question, she said, “Should you today be eating rice or vegetables or meat?” What she meant is that investors should not look at asset classes as identical substitutes. Rather, they should invest across asset classes to get the best out of all of them and remain better protected against market volatility and economic uncertainty. Therefore, the answer to our question is, you should invest in both gold and mutual funds as per your financial goals, returns expectations, risk appetite and liquidity needs.

Gold appears to be scoring over mutual funds investment today. However, the stock markets will bounce back too at some point. A comparative analysis of both is essential before deciding where to invest. Here are a few factors based on which you should decide your investment strategy.

Setting Clear Objectives For Investment

One of the key investment rules is setting your objectives. You should be clear from the beginning about what you want to achieve from a particular investment scheme. Child’s education, home down payment fund, retirement fund, and wedding expense planning are some of the financial goals people invest for. Once you set an investment objective, you must find the appropriate combination of instruments and set a suitable timeframe to achieve the objective. Both gold and mutual funds as investment vehicles serve different purposes. You must use them to achieve objectives suited to them. To be more specific, gold is best used as a haven because it provides stable but low long-term returns. On the other hand, mutual funds are ideal for savings and wealth creation because they can provide high long-term returns with medium to high risks depending on the mutual fund category you’re invested in.

Understanding Risk And Rewards Of Gold And MFs

This is one of the most important aspects to consider while deciding your exposure in each of the investment schemes. When it comes to investments, there is no “one size fits all” strategy. But crucial aspects such as risk and rewards are the ones that help you decide. Gold, if inherited, holds sentimental value, which makes it tough for you to liquidate. While both could be quite easy to invest in, they have their own set of risks. While physical gold investments come with concerns over purity and storage, mutual fund investments are subject to market risks. Digital gold investments, on the other hand, are free of purity and storage risks, but their long-term returns could be insufficient to meet your financial goals on time, especially if your portfolio is not optimally diversified.

On the rewards front, top-rated equity mutual fund investments could fetch higher returns in the long-term despite gold prices reaching new-highs these days. That being said, digital gold investments could also provide solidity to your overall investment portfolio and can be smartly used to offset the impact of market volatility on your investments. It is important to note that the movement of gold prices and the mutual funds are both driven by domestic and external factors and the geopolitical situation. The smart way to pick any of these investments should be based on the requirements of your financial goals, the time available to achieve them, your risk-taking capability and the existing balance of your portfolio.

Ways To Invest

There are various ways through which you can invest in both the instruments. While mutual funds give you the flexibility of investing through systematic investment plan (SIP) and via the lump-sum route, gold can be directly bought through online or offline modes.

You can also choose to invest in both gold and mutual funds via the lump-sum mode. However, do note that the risk of losses are higher as your entire invested money will be prone to losses in case prices fall.  That said, investing in mutual funds through the lump-sum mode could be highly beneficial if you know when to time your investments.

You can invest in MFs through the SIP route by investing amount as low as Rs. 500. The SIP mode of investment is preferred as it inculcates a habit of saving, allows the investor with the benefit of rupee cost averaging and is better equipped to absorb short-term market volatility. When it comes to gold investments, people mostly like to invest in physical gold such as jewellery, bullions and coins. But this could be a riskier option as storage and purity remain a concern and making charges and GST could further eat into your actual returns. A good way to invest in gold is through digital mode. Gold ETFs are a good option as they allow you to invest in gold in the dematerialised form and provide easy liquidity but do not provide any tax benefits, which may affect the returns in the long run. The government-backed Sovereign Gold Bonds (SGBs) is another good digital way to invest in gold which allows a 2.5% p.a. interest income while there is no capital gains tax on maturity redemption. But SGBs comes with a longer lock-in period of 8 years.

How Much To Invest

Your investment exposure to any of these instruments depends on your age, the tenure of investment, return expectation, risk potential and financial goal. Your investment product should serve the goal for which you are investing in. Remember a good investment strategy calls for diversification to get effective results. You should not miss any investment opportunity in either gold or mutual funds, but never put all your eggs in one basket. Your ideal gold exposure should be 5-10% of your overall investment portfolio as gold prices tend to bend towards the flat curve in the long run. Mutual funds give you the choice of diversifying your investments into different categories. You can remain invested in the equity funds for a longer period for goals with a long-time horizon, whereas you can choose debt funds for both long and short term goals. 


Both gold and mutual funds investment come with their own set of pros and cons. You should factor in all the crucial factors discussed above before deciding. You can also take the help of a certified financial advisor to make informed investment decisions.

The author is CEO,, India’s leading online marketplace for loans and credit cards. 

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