Find out which one is your cup of tea – Equity Vs Gold

You should also know the risks and rewards associated with every investment class to decide if a single asset class or a mix of asset classes would help you meet your requirement.

It is really about having the right asset mix in your portfolio that will not only be in alignment with your financial goals but also that caters to the various uncertainties that are looming large on the global economy.

The motive of investing in different asset classes is different and they should be selected according to your financial goals and objectives. Apart from the features, you should also know the risks and rewards associated with every investment class to decide if a single asset class or a mix of asset classes would help you meet your requirement.

Equity

An equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange.

Equity investors purchase shares of a company with the expectation that they’ll rise in value in the form of capital gains, and/or generate capital dividends. If an equity investment rises in value, the investor would receive the monetary difference if they sold their shares, or if the company's assets are liquidated and all its obligations are met. Equities can strengthen a portfolio’s asset allocation by adding diversification classes. As equities have the ability to beat inflation in long run, they may be used for long-term wealth creation. Equities are also tax efficient.

Pros of Equity Investments

·         The main benefit from an equity investment is the possibility to increase the value of the principal amount invested. This comes in the form of capital gains and dividends.

·         An equity fund offers investors a diversified investment option typically for a minimum initial investment amount.

·         If an investor wanted to achieve the same level of diversification as an equity fund, it would require much more – and much more manual – capital investment.

·         Investors may also be able to increase investment through rights shares, should a company wish to raise additional capital in equity markets.

Cons of Equity Investment

·          The dividend which a shareholder receives is neither fixed nor controllable by investor. The management of the company decides how much dividend should be given. If there is a loss, there is no question of dividend. If there is a profit, unless Board of Directors propose dividend, investors will not receive dividend.

·          Equity share investment is a risky investment as compared to any other investment like debts etc. The money is invested based on the faith an investor has in the company. There is no collateral security attached with it.

·          The market price of any equity share has a wide variation. It is always very difficult to book profits from the market. On the contrary, there are equal chances of losses.

·          An equity investor is a small investor in the company, therefore, it is hardly possible to impact the decision of the company using the voting rights.

Gold

Gold is a favourite investment by all and sundry in India. High liquidity and inflation-beating capacity are its strong selling points, not to mention beauty, prestige and so on. Though, there are phases when markets witness a fall in gold prices, it never lasts and always makes a strong comeback. 

Pros of Gold Investments

·               Gold is popularly considered as a hedge against inflation. It has a direct relationship with inflation. During the periods of inflation, investors fear, stocks and debt funds could underperform. But gold has historically performed well during inflation.

·               One of the factors which makes gold a good investment is liquidity. Gold can be easily converted into cash whenever you want. When compared to other investments, gold is the only investment which has high liquidity.

·               To reduce the risk in investment, it is important to diversify your investment portfolio. Gold is an easy and convenient way to diversify the investment portfolio. Gold is inversely correlated with the stock market and currencies. This means gold moves in the opposite direction to rupee and stock market movements.

·               Gold holds an inherent value over a period of time. Even if the price falls, the underlying value of gold does not change much. This is mainly because it is a commodity, whereas Indian Rupee, which is a form of fiat currency, holds no intrinsic value.

·               Indians buy gold more than any other country in the World and gold has been a favorite commodity for both men and women. Gold is used in jewelry since ages. Gold is not subject to any political chaos and signifies how wealthy a country is.

Cons of Equity Investment

·               Gold is not a passive investment like stocks and bonds. Passive investments earn regular income in the form of interest and dividends. But the only income you can get from gold is when it is sold in the open market.

·               If you love holding physical gold, then storage is the biggest issue. Gold has to be stored and guarded carefully, as it is of high value. If you place your gold coins and jewellery in a bank locker, you must pay locker maintenance charges each year.

·               Sometimes the value of gold rises says when stock markets crash and investors rush to invest in gold at high prices. Once the panic dies down, the price of gold corrects itself. This might lead to losses for the investors. Be Wise, Get Rich.

Conclusion

Investments of any kind have their own set of pros and cons. For gold investment, the safety and security of physically protecting the gold can be risky and cumbersome. Although investing in gold comes with a bunch of disadvantages, the other viable investment option that one can consider is Equity & Mutual Funds. They are also more tax-efficient as compared to traditional investments.