Last Updated on Oct 2, 2023 by Tejas Tank
When you consider investing your money, there are a number of options that you can consider. One of the key factors that you might take into consideration would be the level of risk associated with the investment.
Depending on the risk appetite, one may opt for cryptocurrencies, which are some of the riskiest assets to invest in, or mutual funds that are amongst the least risky. Before we discuss the differences between the two, let us understand exactly what cryptocurrencies and mutual funds are.
Table of Contents
What are cryptocurrencies?
Cryptocurrencies are a medium of exchange based on a peer-to-peer system where the responsibilities of managing and maintaining its value are distributed amongst the users. These are not regulated by financial intermediaries such as banks or the Government.
Cryptocurrencies are intangible and are stored in online wallets. All the transactions are recorded in code on a public distributed ledger called the blockchain. They are called so because they use encryption to conduct transactions.
The basic outline for the first cryptocurrency, Bitcoin, was given by Satoshi Nakamoto. Bitcoin, Ethereum, Polygon, Solana, Polkadot, BNB, USDT, Ripple, Binance Coin, etc., are some of the most popular cryptocurrencies out of the 5,000 that are traded.
Indian investment in the crypto market hit a mammoth Rs. 75,000 cr., with blockchain and cryptos attracting $638 mn. worth of funding, just in 2021.
Advantages of cryptocurrencies
Cryptocurrencies are decentralised, i.e., they cannot be manipulated by the Government (unlike fiat currency that can be printed to increase liquidity or interest rates manipulated to reign in liquidity). They have lower transaction fees, can transfer faster, and are considered more secure and private, with zero interference from any financial institution.
Many token/cryptocurrencies have delivered 1000% + returns in a matter of just a few days, something no other asset class can boast of. These tokens, therefore, have earned a name as good protection against inflation.
Cryptocurrencies are touted as the future of currency. The value of most cryptocurrencies remains undiscovered yet. In such a case, having them in your portfolio can be very beneficial.
Disadvantages of cryptocurrencies
The biggest disadvantage of cryptocurrencies is its increased use in terror funding across the globe, making it hard for law enforcement to track criminal activities. It is the primary reason why most Governments are wary of this asset class.
The second major disadvantage is that this asset class is extremely risky. Corrections up to 60-70% have been observed in the crypto markets. Moreover, the markets are anticipated to be highly manipulated by big wallets, celebrities, and online communities.
Cryptocurrencies are also detrimental to the environment, with mining demanding high voltage and carbon footprints. Lastly, this market is highly susceptible to online hacking and fraud. Since it’s deregulated, nobody could be liable in case of fraud and theft.
What are mutual funds?
Mutual funds are a type of investment instrument wherein money is pooled from institutional and individual investors and then is collectively used to invest in various financial instruments like equities, bonds, money market instruments, and others. The entire amount that is invested is referred to as the portfolio and it is managed by an Asset Management Company (AMC).
Different types of mutual funds have different levels of risk associated with them like debt funds have lower risk levels than equity funds. One can invest in mutual funds by directly visiting the nearest branch of the fund house, the website of the fund house, through a broker, or a mobile app.
Advantages of mutual funds
Mutual funds can effectively mitigate your risk as they diversify across stocks, sectors, and asset classes. They are managed by experts who understand the market and its nuances well. The research and management of your corpus are effectively done by fund managers, thereby saving time and effort at your end. Not to forget the expertise that you get access to.
These funds allow you to have stock-market-like returns while reducing your risk significantly. Also, most of these funds are tax-efficient.
Disadvantages of mutual funds
Mutual funds can carry high expense ratios, which can, in turn, eat into your profits. As the fund is diversified, the profits can be diluted. Also, the lock-in period ( in the case of close-ended funds) can be higher.
Mutual Funds vs. cryptocurrencies
| Point of difference | Mutual funds | Cryptocurrencies |
Method of operation | Money is pooled from investors and invested in securities. | A person can invest in desired cryptocurrencies through an online wallet. |
Operated by | Fund houses or Asset Management Companies | Creators of the cryptocurrencies and management tasks are broadly distributed amongst investors. |
Reason for investing | Usually, to gain returns on surplus income or for long-term gains. | Some people invest to take advantage of price fluctuations. Others believe that it is a convenient investment for long-term gains without deflationary pressures. |
Year of introduction | 1963 | Cryptocurrencies were first invented in 2008 as a result of the global financial crisis. They began gaining popularity in India in the mid-2010s. |
Government’s stance | The Government encourages investment in mutual funds, and there are a few state-owned mutual funds as well. | The GOI is still wary of cryptocurrencies and has banned mutual funds from investing in cryptocurrencies. The Government plans to regulate investment in cryptocurrencies rather than ban it by introducing a crypto bill. |
Minimum and maximum value | Systematic Investment Plans (SIPs) start from as low as Rs.500. Usually, there is no maximum value. | Minimum and maximum values change depending on the digital wallet. |
Rate of return | It is not fixed and is based on market performance and the fund manager’s strategy. | Different cryptocurrencies have different rates of returns. |
Level of risk | Varying levels of risks for different funds. They are also are subject to market risk. | Extremely risky |
Maturity Period | No specific date or tenure. Investors can exit the fund at any time. Investors can choose to invest for short, medium, or long term. | A person can stay invested for as long as they wish and for as long as the crypto is still functional. |
Level of Liquidity | Relatively high level of liquidity. There exist mutual funds where investors can withdraw their money even after one day. Usually, AMCs charge a fee called the “exit load” if an investor wishes to withdraw their funds before a stipulated period of time. This applies to open-ended mutual funds only. | Cryptocurrencies with large market caps like Bitcoin and Ethereum are some of the most liquid assets. |
Tax Efficiency | Different mutual funds (depending on if they are equity-based or debt-based, or hybrid) have different tax rates for both the short and long term. | LTCG (more than 36 mth) tax of income from the sale of cryptocurrencies is charged at 20% post indexation.STCG tax is the same as the income tax rate of the individual. |
Which is better for you?
The main deciding factor while deciding to invest in cryptocurrencies or mutual funds is the level of risk individuals are willing to bear because cryptocurrencies have a considerably higher amount of risk associated with them.
While mutual funds are subject to market risks and others, cryptocurrencies are subject to a broader range of risks, as discussed above. A significant amount of information is available about mutual funds since they have been around for a much longer time.
On the other hand, cryptocurrencies are a very new concept, and there is a lot of misinformation in the market surrounding them.
Moreover, there is a long way to go before cryptocurrencies are accepted as a legal currency in many countries, including India.
While some believe that crypto will conquer the world, others believe that it is a bubble that will burst at any time.
Conclusion
The mutual fund vs cryptocurrencies is an interesting debate. The investment goal needs to be clear before deciding to invest in any asset class. If risk is not your primary concern and you can digest extreme volatility, cryptocurrencies can be your choice of consideration. On the other hand, if you are looking for stable returns and risk management, you can consider investing in mutual funds. Regardless of what you choose to invest in, it is crucial to conduct proper research and choose the investment which best suits your risk appetite and overall financial goals.
