Mutual Funds vs Bitcoin – Where should you invest?
In the present day, the world of investors wants to know which one really wins when we are talking about mutual funds vs bitcoin. So far, the kind of credibility mutual funds have been built among investors (through advertisements and endorsements) is commendable. However, times are changing and mere advertisements can’t be proof enough to draw a conclusion regarding which is a better investment option.
So how about we draw a conclusion right here? Sounds fair to me. But first off, let’s see what they actually mean.
What is Bitcoin?
Bitcoin is the world’s first cryptocurrency that prospered. Its whitepaper was released in 2008 by Satoshi Nakamoto (alias). The whitepaper explained the underlying blockchain technology and demonstrated how a cryptocurrency works seamlessly in tamper-proof network. The rest is history. Essentially, bitcoin is a coin, and not a token, which means it can be used as money and its value is not restricted to a network. In the present day, the value of bitcoin has increased and is far from where it started, and currently it is a highly traded asset. Primarily infamous for its volatility, bitcoin has still been the most returning asset in the history of assets, be it bank deposits, fixed deposits, stocks, mutual funds, or even Gold.
What are Mutual Funds?
In plain words, a mutual fund is called a mutual fund because it collects money from multiple investors, which is then invested by a funds manager into various financial instruments like shares, equity stocks, bonds, and more. And how well the funds would perform depends upon how well the funds are being invested and managed.
In a nutshell, the word mutual funds comes from the fact that a number of people are investing, mutually. Mostly, the USP of a mutual fund, from a technical standpoint, is diversification, which means the funds are invested in assets with different risk ratios.
Learning about both, we can clearly say that the underlying asset is quite different in two of these cases. Considering mutual funds vs bitcoin, the former has a group of different underlying assets for the sake of diversification, while the latter has the world’s first cryptocurrency as a backing asset, with a standalone market cap in billions.
Returns Comparison – Mutual Funds vs Bitcoin
Having different underlying assets make mutual funds and bitcoin, completely different asset classes, which is why they have a significant difference in their returns. While on the one hand, mutual funds have had a long standing history of returning 10-12% annually, bitcoin has returned at least 25% annually, when invested systematically with DCA strategy.
How to invest in Mutual funds and Bitcoin?
Even though both are for investing money, the pathway of investing in mutual funds and bitcoin are quite different. And that is because they are assets from two different financial ecosystems.
Investing in bitcoin
Investing in bitcoin can happen in two ways. You can either go to a cryptocurrency exchange and buy a lump sum amount of bitcoin, or you can purchase small amounts of bitcoin at regular intervals with the help of an SIP in bitcoin. The latter is a more recently introduced way inspired by Dollar-cost Averaging, or simply DCA. DCA is an investment strategy where the core objective is to reduce the impact of any asset’s volatility; bitcoin included.
For some people, choosing to invest in lump sum or taking the bitcoin DCA route is a confusion. But there is no need to be confused. How you should be investing depends entirely upon what your goal is. Depending on your goal, you can invest in bitcoin in 2 ways:
- Lump sum for short-term goals
If your goal is to invest a sizable amount, also called lump sum, into bitcoin at once and want to exit with profit as soon as possible, you might want to go for a lump sum investment. No wonder if the market goes up, you would make huge returns, provided the invested amount was huge enough. That’s a pro.
But if the market goes down and you react all panicky, you may end up with a considerable loss. That’s a con.
Another mild con would be that you would have to monitor the market at all times or at least be aware of the market movement in general. In a nutshell, keeping a tab on the market is essential if you invest a lump sum in bitcoin
- Bitcoin DCA for long-term goals
Long-term goals are when you are not in a hurry just for the sake of profit and are patient enough to gradually build wealth for your long-term goals. If that’s what you aim for, you should take the bitcoin DCA route. In case of bitcoin DCA, you invest into bitcoin over a long period of time at different price points, so that you are avoiding the impact of bitcoin’s price volatility on your investment and moving towards bigger, long-term goals.
Investing in a Mutual Fund
Investing in a mutual fund demands you to catch up with some prerequisites first. If you decide to go investing with the help of an Asset Management Company (AMC), you just need to fill the registration form, have KYC compliance and let the funds manager invest for you.
Alternatively, if you don’t want to invest via AMCs, you can get a demat account and do it via trading. However, this method is not recommended as the maintenance charge is quite high for demat accounts.
Something you shouldn’t forget is that investing in mutual funds comes with its own set of risks, and in the short term, risks associated with mutual funds could bring down your portfolio more often. So from a mutual funds vs bitcoin perspective, numbers suggest that bitcoin DCA has lesser chances of turning your portfolio negative in the long run.
Is Bitcoin legal in India?
Bitcoin is neither legal, nor illegal in India. Meaning, currently there are no laws or code of conduct in our constitution that cover cryptocurrencies, so there is no penalty for possessing and dealing in cryptocurrencies. Apart from that, the rumoured ban on cryptocurrencies in India is completely false.
The only step that the government took to restrict the growth of cryptocurrencies in India is severing the tie between cryptocurrency exchanges and banks, so that they can curb the proliferation of cryptocurrencies until a firm decision can be taken. In short, cryptocurrencies are not banned in India. For more, check this article: https://news.bitcoin.com/rbi-confirms-crypto-not-banned-in-india/
Best way to invest in bitcoin and mutual funds
So for the most important question – What is the best way to invest in mutual funds and bitcoin?
We have already discussed two ways in which we can invest in bitcoin – lump sum and DCA. So which one? I’d say DCA because it beats bitcoin’s price volatility, which is probably the biggest concern for people who want to invest in bitcoin but won’t dare to because of the infamous price volatility.
For mutual funds, it’s always better to invest through an AMC because it’s the easiest and most cost-efficient option.
Mutual funds and bitcoin both are good investment options, albeit they have entirely different league of investors. But as time passes, more investors are investing in bitcoin via the DCA route. What makes things interesting is that even the conventional, expert investors have also started to see the long-term benefits of investing with bitcoin DCA. In the past few years, bitcoin has evolved from being an obscure investment to a mainstream one, which is mostly because bitcoin, consistently, has only grown in the long-term, and DCA is the latest found breakthrough in bitcoin investments.
On the other hand, a majority of investors still count on mutual funds as a safe and sound conventional investment. But if bitcoin DCA has even lesser risk compared to mutual funds and still manages to return much more in comparison, are we going to see a paradigm shift in investor sentiment in the coming few years? Only time can tell.
Mutual Funds vs Bitcoin - Where should you invest?
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