Bitcoin Vs Mutual Funds: Where to invest?

19 Mar 2021  Read 1115 Views

We live in times when people have numerous investment avenues – avenues that present a strong wealth creation potential and generate greater returns than the traditional investment options.

So, it's at the investor's disposal to choose – from traditional financial assets (like mutual funds, bonds, ETFs) to emerging digital options (like cryptocurrencies/bitcoins).

Bitcoins have become a sensation since their first introduction to the world. Someone who invested $100 in bitcoins in 2009 has seen his investment grow to over $10 million over the last decade. As mind-boggling as that fact is, no other asset class has managed to generate returns even 1/10th of what bitcoins generated. And rightly so, bitcoins have become the best performing financial assets known to mankind.

But make no mistake! The governing laws and investing process in bitcoins are in stark contrast to those of mutual funds. And thus, this article will discuss bitcoin investing and explore whether it is a better investment opportunity than mutual funds.

This article is a part of a series of articles we wrote on bitcoins – bitcoin basics, mining process, myth-busting, valuations, and working of the mining process.

Bitcoin vs. Mutual Funds

So, wait for what? Let's get started.

Basics – What are bitcoins and mutual funds?

Bitcoins 

Mutual Funds

Bitcoins are cryptocurrencies that are a peer to peer electronic cash system that helps users send and receive money over the internet at fractional costs compared to the traditional banking system.

Mutual funds refer to the pool of funds from many investors invested in equity and debt securities or a combination of both. Mutual funds are professionally managed.

Let's talk about valuation:

Bitcoins 

Mutual Funds

Bitcoins are often referred to as digital gold because:

  • Unlike traditional assets like gold or silver, bitcoins are entirely scientific and mined through solving mathematical problems.

  • They possess all the properties to be called money – durability, portability, divisibility, fungibility, and scarcity.

  • They are counterfeit-resistant.

  • They are an excellent store of value

  • The critical factor that drives the bitcoin value is the market demand and supply. (read our previous article on bitcoin valuation to know more)

  • Mutual funds are valued based on net annual value (NAV). 

  • NAV is the total value of all the assets/securities in the portfolio minus the outstanding liabilities. 

  • When the NAV is divided by the total number of units, we get the NAV per unit, which changes every day and is updated after the market's closure.

Let's compare bitcoins and mutual funds:

Points of distinction

Bitcoins 

Mutual Funds

Easy to invest?

You can invest in bitcoins within minutes.

The investing process is simple but may entail lengthy documentation.

Investing modes

Bitcoins can be bought from a crypto-brokerage firm or crypto-exchanges.

Mutual fund investments can be made directly with mutual fund houses or online mutual fund platforms.

Risks involved

Bitcoins are highly volatile and are often termed as high-risk investments.

Mutual funds entail lower risk compared to bitcoins.

When can you trade?

Bitcoin's market operates 365 days 24x7.

Trading is time-bound and stops when the market closes at the end of the day.

Costs involved

Investing costs are minimal.

High investing costs because of transaction fees like exit load.

Taxability 

Gains may be taxed as capital gains or business income or professional income, or other sources. 

Gains are usually long-term (LTCG) or short-term (STCG).

Legality 

Bitcoins are legal but have not been recognized for governance.

Mutual funds are legal and governed by the SEBI.

How can you invest in bitcoins?

They say that bitcoins' value has appreciated such highs that one bitcoin is sufficient to buy a one-BHK residential flat in a metropolitan city. Does this sound enticing? Does this make you want to invest in bitcoins? Well, as it turns out, investing in bitcoins is not as difficult as you would have imagined. All you need is access to a crypto trading application or a platform to exchange rupees for bitcoins.

The sign-up procedure is similar to any e-commerce platform – a simple KYC verification, linking of a bank account and Aadhaar number – and you're good to go purchasing bitcoins using the Indian fiat currency that is the rupee.

A quick google search shows that one bitcoin is equivalent to approximately 39 lakh rupees. But that does not mean you have to invest in one bitcoin right away. You can start your crypto-journey with as low as Rs. 500, which will buy you a tiny portion of a bitcoin. As we have already discussed, there are no statutory regulations over bitcoins. Therefore, there is no maximum legal limit to the number of bitcoins a person can buy. You can buy as many bitcoins as you want. However, it is to be noted that the absolute limit to the bitcoins is the total number of bitcoins that can be mined, and that is 21 million, of which almost 18 million (including those that have been lost) have been already mined and close to 3 million remain to be mined.

How can you invest in mutual funds?

You can invest in mutual funds through your financial advisor or an online platform. It is essential to know the type of fund you want to invest in and pick the scheme type and asset management company accordingly.

Once these preliminary steps are completed, you just have to follow a simple online registration and KYC procedure to get started and make an online payment of the amount you wish to invest. If you're investing through an advisor, you may have to provide a bank cheque citing the investment amount.

You can make a lump sum investment in a mutual fund. However, the minimum investment amount varies from one fund house to another, and also with the type of scheme you choose.

What's the best investment option – bitcoins or mutual funds?

It is a fool's errand to measure and compare bitcoins and mutual funds on the same scale. Both present entirely different investment options. However, both adhere to one mantra – one must invest according to his risk appetite after carefully weighing in the facts, figures and risk factors.

Investing in mutual funds makes sense for people who are somewhat risk-averse. True, mutual funds have risks associated with them, but even with some short-term volatility, most companies will likely continue to exist in the future. Investors investing in a broad-based index fund or ETFs made up of stocks stand a good chance of reaping stable gains in the long run.

Investing in bitcoins makes sense for those who are looking for a 'little extra diversity in their investment-portfolios and can take risks related to fluctuations and volatility. However, many experts believe that even if you think that bitcoin investment is a good fit for your portfolio, it should not be the central focus of your investment strategy. And truly so.

Closing Remarks

Bitcoins are a new and emerging asset class that present an investment opportunity with great return potential. Mutual funds have been around for a while now and provide stable and less risky returns. 

As we have already discussed, bitcoins and mutual fund investments both have their own pros and cons. You should invest in either, based on your risk tolerance capacity, after careful consideration of the risk-return trade-off.

Stay Positive, Test Negative

Happy Investing!

About the Author: Shrey Salwan | 43 Post(s)

Shrey Salwan is an MBA student at FLAME University, Pune, majoring in Marketing. He is also pursuing CA and CS. He is a creative thinker, a grammar nazi, and social media enthusiast seeking to work in the dynamic world of social media and content marketing to transform technical and digital information and processes into influential stories. He has a knack for telling stories and does so through his quirky way of writing.

 

Liked What You Just Read? Share this Post:

Finology Blog / Invest / Bitcoin Vs Mutual Funds: Where to invest?

Wanna Share your Views on this? Comment here: