Gold vs Mutual Fund – What Should You Choose?

9 min read • Updated 16 January 2023
Written by Nishant Prasad

In India, gold holds a special place in people’s lives as it is associated with auspicious occasions like weddings and religious festivals. Almost everyone owns gold in the form of jewellery or coins. However, investors looking for higher returns and income may prefer investing in mutual funds. 

This article explains the important  details of gold vs mutual fund comparison and helps you make an informed decision.

Investment in Gold 

Gold is a precious metal and is widely considered a safe investment. Most Indians possess gold in the form of ornaments. Generally, people avoid selling gold that they bought as it stands for long-term investment. Gold investments also act as a hedge against inflation. 

Today, there are multiple ways to invest in gold other than buying gold coins, bullion or jewellery. One can buy digital gold or invest in gold Exchange Traded Funds (ETFs) or Sovereign Gold Bonds (SGBs). For long-term investment, many experts consider SGB as the most suitable option.

The Reserve Bank of India (RBI) issues certificates against specified grams of gold, enabling people to invest in gold without worrying about the safety of the physical asset. These are referred to as sovereign gold bonds

The performances of all gold investments depend on the market price of gold. Thus, all gold investments carry the risk of volatility from gold prices. Physical gold comes with the additional burden of making charges and the risk of loss/theft.

Benefits of Gold Investment

Listed below are the benefits of investing in gold.

  • During economic recessions and market volatility, gold exhibits good and steady performance.
  • The price of gold usually remains stable and is not expected to fall massively during an economic crisis. This makes gold a relatively safer investment during such times of crisis.
  • Gold investments work well as a hedge against inflation.
  • People can easily get an affordable loan against gold. 
  • It is an ideal diversification option for your portfolio which may contain stock and real estate investments. 
  • Due to its high liquidity, one can easily buy and sell gold in the market. 
  • It is a good and safe option using which you can pass on wealth through generations and save money for the future. 

Reasons to Avoid Investing in Gold 

Here are the reasons to avoid investing in gold: 

  • Buyers pay waste fees and make charges while purchasing gold jewellery. However, when that person decides to sell the same jewellery, he or she cannot recover these amounts.
  • Gold cannot generate dividends and rents, unlike stocks and real estate.
  • Investing in gold coins and bars can result in losses because these items usually sell for less than their current buying price. Moreover, banks do not prefer buying coins and bars once sold.
  • Holding something valuable like gold comes with the risk of theft. Apart from storage issues, gold investments are also associated with risks of impurity. 
  • Gold prices in India depend on the price movements in the international market. The dollar plays a crucial role in determining gold prices. As a result, any major fluctuation in the global market might reduce gold prices in India. 
  • Furthermore, investing in Gold ETFs might be more expensive than physical gold. Gold ETF is an exchange-traded fund that tracks the price of domestic physical gold and invests in gold bullion. 
  • Lastly, people may not always be able to fulfil their financial goals with gold investments. This is because gold ornaments are often passed down through generations and carry sentimental value. Therefore, it hinders them from reselling gold jewellery even in financial distress.

Investment in Mutual Fund 

Asset Management Companies (AMCs) offer various types of mutual funds. These are investment vehicles that pool money from many investors and invest in equities, bonds, and other financial instruments on their behalf. The income or gains that this collective investment generates get distributed among investors after the deduction of the applicable charges. 

This is done after calculating the fund’s NAV. A mutual fund unit is bought/sold at its NAV. It is the combined market value of a fund’s net assets after considering all expenses and liabilities on a particular day.

Over the past few years, the number of mutual fund investors has grown as more people are becoming aware of its benefits.

Benefits of Investing in Mutual Funds

Discussed below are the advantages of investing in mutual funds: 

  • Diversification of a fund’s portfolio is a major benefit because a fund invests across different asset classes. This leads to better returns and mitigation of risks.
  • Professional experts are responsible for managing these funds. Fund managers use their knowledge and experience to evaluate the market and select investment instruments that will generate maximum returns for their investors. 
  • A plethora of mutual funds cater to various types of investment goals. For example, if an investor wishes to invest for the long term, equity funds are suitable. On the other hand, if an investor has short-term goals, ultra-short-term funds can be a good option. 
  • As  compared to gold, it requires a low amount for initial investment. For example, if you choose to invest via a systematic investment plan (SIP), you can start your investments with Rs. 500. 

Reasons to avoid Investing in Mutual Funds

Listed below are the disadvantages of investing in mutual funds:

  • There is no guarantee that mutual funds will generate high returns. A historically good performance of a fund does not guarantee its good performance in the future.
  • The value of an individual’s investment may fluctuate depending on the movement of the interest rates, currency exchange rates, taxation rules, political and economic factors, and prices of the securities the fund has invested in. 
  • Some mutual funds like ELSS have a lock-in period which prevents you from liquidating your investment.
  • Due to diversification and fund expenses, an investor may not be able to get as much profit as possible from direct equity investments.

Taxation Rules for Gold and Mutual Fund Investments 

Given below are important points related to taxation:


The following are the taxation rules for gold investments:

  • Capital gains earned from physical gold, gold funds, gold ETFs and digital gold are taxable according to the holding period. For example, if an individual holds the investment for up to 3 years, the short-term capital gains (STCG) will be taxed as per his or her income tax slab rate.
  • If the holding period is 3 years or more, the tax rate for long-term capital gains (LTCG) is 20% with an indexation benefit. 
  • Interest earned from sovereign gold bonds is added to an investor’s income and taxed as per the applicable slab rate. No capital gains tax is applicable if the bond is held till maturity.

Mutual Funds

Detailed below are the taxation rules for mutual funds:

  • Mutual funds are taxed as per their holding period and type of funds (equity or debt-oriented).
  • If the holding period of equity fund units is less than 1 year, the STCG tax rate is 15% with a 4% cess. On the other hand, LTCG is taxed at a 10% rate with a 4% cess, but these long-term capital gains are tax-free up to Rs. 1 lakh.
  • Short-term capital gains from debt funds are added to the investor’s income and taxed as per the applicable slab rate along with a 4% cess. On the other hand, LTCGs are taxed at 20% with indexation. LTCG in debt funds is applicable if you hold fund units for at least three years.
  • According to Section 80C of the Income Tax Act, you can deduct the amount invested in ELSS mutual funds from your taxable income. However, the maximum amount that one can deduct is Rs. 1.5 lakh.

Gold vs Mutual Funds – A Comparative Study  

The table below enumerates the key points of gold vs mutual fund investments: 

ParameterGold Mutual Fund 
Category Gold is both an investment asset and a functional commodity. This is entirely an investment option. 
Returns Investment in gold may generate returns, but they will be lower compared to mutual funds in the long term. Returns depend on the mutual fund type. But, past performances have shown that funds generate 10%-12% returns annually. Some schemes may even generate 15%-18% returns per year. 
TypesIt is available in the form of physical and digital gold.Major types include equity, debt, and hybrid schemes. 
BenefitsGold acts as a hedge against inflation. Moreover, Sovereign Gold Bonds may generate interest and returns over the long term. Equity funds generate better returns than gold. Underlying securities of the fund may benefit from the country’s development as well. 
Investment CostInvesting in physical gold, and gold bonds requires a higher quantum of money. The minimum investment amount can be as low as Rs. 100. So the minimum fund requirement is very low.
Compounding Investors do not receive the benefit of compounding. Gold does not generate interest or dividend income, so one cannot reinvest it. Investors receive the benefit of compounding. Growth funds are a good option to benefit from compounding. 
LiquidityGold is associated with high liquidity, and one can exchange it anywhere at any time. Mutual funds are also highly liquid. You can redeem units of an open-ended fund from the fund house.

Concluding Remarks

When comparing gold vs mutual fund investments, one can notice that each has its pros and cons. While gold is suitable for hedging against inflation, it comes with various expenses and slow growth disadvantages. On the other hand, mutual funds allow people to invest in a range of securities according to their preferences.

Frequently Asked Questions  (FAQs)

Is there any mutual fund that invests in gold?

Yes, gold mutual funds are open-ended schemes that primarily invest in physical gold or gold ETFs. You can use these funds to protect your portfolios during periods of recession.

Which is the ideal mutual fund for beginners?

Mutual funds are a suitable investment option for beginners as they allow you to take exposure to equities or debt easily. For equity investments, you can opt for index funds; they usually offer stable returns. ELSS fund is another good option as it offers tax benefits. You should choose funds based on your risk tolerance.

Which is better—physical gold or digital gold?

This depends on the investor’s investment goal. However, one should note that digital gold does not carry any risk of theft or storage charges, unlike physical gold.

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Nishant Prasad

Chief Compliance Officer
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 8+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert. He has previously worked for Khaitan & Co and Scripbox.

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