Comparing gold investment to stock funds is a common choice many invetsors debate. Where would your money work best and which will provide highe returns
Capital markets have generated good returns during upswings in the stock markets around the world. However, investing in company stocks is a risky business. Capital markets were initially isolated and rose and fell based on market forces and investor sentiment within regional economies. But with the advent of globalisation, it all changed. In today’s day and age, events in one part of the world create ripple effects across the important global stock exchanges like the London stock exchange (LSE), New York stock exchange (NYSE), the Hang Seng of Hong Kong and the Bombay stock exchange (BSE) in India. Numerous forces are at work, including interest rates, fiscal measures implemented by countries, the forces of inflation and geopolitical scenarios across regions.
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It’s not just macro-economic forces that are at work; the economics of supply and demand within industry sectors, competitor action and drivers within each industrial segment are all responsible for the rise and fall in stock prices. In order to analyse all this information and derive a successful investment strategy is a full-time job. In addition to this, picking the right stocks that are likely to generate the desired level of returns within your investment horizon requires special skills.
Due to this, thousands of retail investors invest their money in mutual funds and rely on the fund managers to make the investment decisions. Being an institutional investment house, mutual fund companies employ teams of research analysts who conduct research on companies based on industry sectors. This involves assessing the fundamentals of the companies, financials, the quality of the company management and their performance in the market. Key performance indicators (KPIs) like total shareholder returns (TSR), price earnings ratio and returns on capital employed (ROCE) are also taken into account.
In spite of all the science behind investments, it is virtually impossible to predict global events that lead to boom and bust cycles in the stock markets. For example, no one could have predicted 9/11 and the impact it would have on the global economy. If you were the greatest fund manager with an unerring ability to pick winning stocks each and every time, you would still have been caught unawares. Mutual fund investments, therefore are fraught with markets risks, no matter the quality of fund management or NAV (Net Asset Value) performance.
Apart from market risks, let’s explore some of the other drawbacks of mutual fund investments. Gold, on the other hand, is an asset class that’s simpler, more robust, steady and delivers sustainable value over a period of time. To start with, there’s less volatility within the class itself. As discussed earlier, mutual fund performance is dependent on the state of the stock markets. Even diversified equity funds that spread their risks by allocating investments over a range of industry sectors are sometimes overweight in a certain sector, making it vulnerable to sectoral risks.
High fees – Well managed funds need to pay high salaries to investment professionals and run a well-oiled team. Needless to say, these costs are passed on to the investor, i.e. you. Buying gold from a reputed online broker is simpler, more transparent and incurs lower costs.
Selling price – You can’t sell your mutual fund investments like you sell shares. Since funds operate on the principle of a daily NAV, when you issue an instruction to sell, the price isn’t fixed until the trading day ends. Physical gold, on the other hand, is sold as per the spot price per troy ounce and the selling price is decided at the time of the sale.
Capital gains tax conundrum – Mutual funds charge their capital gains tax bills back to the investors simply by distributing them regardless of how long you’ve been invested. If you were invested in direct equity, on the other hand, your CGT bill would have been lower, if you had held your positions for the long term. Of course, long-term capital gains taxes are lower.
Also, the fund may have sold some profitable equities and amassed a capital gains tax bill that they would distribute across the fund holders. But, if those profitable investments weren’t part of the scheme you invested in, and your scheme ended up posting losses, you’d still be paying a tax bill although you didn’t rake in any profits. However, investments in gold in the UK are capital gains tax-free. Now that’s a compelling reason to invest in gold from a tax point of view.
At Physical Gold, our investment advisors can help you make the right investment choices and help you select asset classes based on your investment goals. Call us on 020 7060 9992 or email us and a member of the investment team will get in touch with you right away.
Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.