Akshay Tritiya, the festival which is associated with buying gold, is here. I could be wrong but historically, the festival of Akshay Tritiya as a gold buying occasion was quite specific to some communities and some parts of the country. I grew up in a fairly traditional environment in North India and had literally never heard the name till I came across it in advertising by a bank, perhaps around 2007 or so. However, over these years, businesses offering various investment products based on gold have systematically promoted the gold buying idea and now this is a fairly well-established day to do so across much of the country.

Of course, The Indian psyche is hardwired to view gold as an investment. The interesting point is that while the tradition was obviously entirely of buying gold jewellery, the promotional push has now involved every form of ‘paper gold’. Investment apart, the logic of gold jewellery as streedhan in a patriarchal society is perfect. However, things are a little different now and I’m not sure whether gold has the same characteristics as an investment anymore. The rise of ‘paper gold’, which is gold-derived financial instruments, has converted gold into yet another financial asset. Which is okay, I suppose, because that’s the way things are right now, and financialized gold products do have many qualities that make them superior investments, despite the fact that it don’t offer the same satisfaction that actual gold can.

The best I can say is that historically, gold was a good store of value and some of that survives till today. However, it is not good as an investment. Over long periods of time, rising gold prices give an illusion that the returns are good. For example, over about 40 years (from 1981 to 2021, March 31 numbers), the price of gold has gone up 29 times, from Rs 1800 for 10 gm to Rs 48,720. That sounds amazing, doesn’t it? Well, over the same period, the Sensex has gone from 173 points to 49,509. That’s 338 times! There is no comparison, at all. Gold is somewhat better than inflation, depending on how you measure inflation but that’s about it. It just stores value – there is no meaningful appreciation.

This is true, sometimes but it’s not a sure shot thing in severe crises.

The bottom line is gold is not a great investment and no one should hold any significant amount of gold for investment purposes. However, if you are unable to fully escape a few thousand years of beliefs and must necessarily buy gold, then sovereign gold bonds are the best way of holding gold and jewellery is the worst. In fact, jewellery was never a great option. Even for physical gold, for investment purposes, gold coins have always been the sensible choice. Essentially, there are two types of non-physical investment in gold available in India, Gold ETFs/gold funds and sovereign gold bonds.

Till 2015, before the bond scheme was introduced, ETFs and funds were the best way to own paper gold but now, SGB is the better choice. It replicates the returns (positive or negative) of gold, but also pays you an interest of 2.5 percent per annum.

Of course, do understand that I’m saying all this under pressure, so to speak, just because people keep asking. Personally, I do not invest in gold, and I don’t think anyone should but if you have to do it then SGBs are the least worst way of doing so.

It appears that the biggest problem when it comes to personal finance and investment is that people don’t invest in the right mutual funds or stocks. Investing seems to be largely about choosing the best mutual funds, or the hottest stocks. But this is an illusion. Most people invest too little or do not invest at all, which is the real problem. They start late in life, sometimes never start, and then invest too little.

It’s said that ‘better late than never,’ and maybe that’s true for most things in life. But starting late is worse than starting early in saving and investing. How much worse? Here’s an example. Let’s say that you want to turn your money 10 times. To do that, 30 years at a return of 8 per cent a year is equal to 20 years at 12.2 percent and 15 years at 16.6 percent.

You should read that again and give it some thought – absorb what I’m saying. 8 per cent per year is not a trivial rate of return but is not difficult to achieve on a sustainable basis – everyone reading this would be confident of doing so and most would succeed too. In 30 years, it’ll turn your investments 10 times.

But if we waste the first ten of those thirty years, then to make our money 10 times, we will need to earn at 12.2 per cent a year. That’s not so easy and in fact would require a reasonable amount of skill, perseverance and the right attitude to do so. Moreover, it would involve investing a fair proportion in equity which would bring with it volatility and need a certain mental toughness to tackle.

However, most people actually waste more than the first ten years of their investing life. Or someone who starts earning at 22 or 23 years of age, it is not uncommon to reach almost forty years of age before starting to invest seriously. This brings us to the almost impossible part of the equations above. To earn 10 times in 15 years, one needs to sustain 16.6 per cent a year. Only a small proportion of investors can do this, and then too chance will play a role. I’m not saying that this cannot be done, but it’s not something that anyone can rely on happening.

There’s a story that Albert Einstein was once asked what humanity’s greatest invention was and he replied, “Compound interest.” While we are not talking about interest income alone, the compounding of investment returns is essentially the same thing.

The largest barrier to not being able to make enough from investments is not choosing one fund, stock, or a technique over another, but also not beginning out early enough. There are two kinds of reasons that people do not start early enough. One is simply the curse of our society. There is so much to spend and it’s so easy to not just spend what you earn but to spend what you will earn in the future. This is compounded by another problem – when a young person wants to save and begins to hunt for advice and information, they encounter figures that are so enormous that their own savings capacity appears small. Many users of social media advertise monthly SIPs of 50,000 or a lakh and investing lakhs in stocks. Someone who has just started earning and can maybe spare one thousand rupees a month feels that it’s a useless and embarrassingly small amount so might as well buy another pizza or that new pair of headphones!

That’s the problem. In reality, even a few hundred rupees a month in a recurring deposit in the bank where you have an account is fine as a beginning. Just begin somehow, anyhow, with anything. That’s all that’s needed. The rest just follows.

For investors, the most important decision, A simple question with a complex answer.

As soon as a saver starts investing, the most important question he has to answer is: which crypto currency should he put all his money into? Right? Well, not really. This column is not meant for those sorts of people.

In both cases, the ultimate goal is to invest in stocks and generate wealth through equity-based returns. In reality, the question is whether one should directly invest in stocks or through equity mutual funds. A similar question arises when savers graduate from being just depositors to actual investors and learn the power of equity returns. You cannot make the right decision by passively absorbing what is being said and written in the media and on social media. You will always be driven towards equity if you go by noise levels alone. Equity investing generates far more news and excitement than any other type of investment – that is inevitable.

It doesn’t mean that it’s the best choice for you. It is often said that stocks vs mutual funds don’t have a clear answer. That’s not true – it does have a clear answer. The problem is that it has no clear universal answer, which applies to every saver. The answer is simple, but it’s your answer, and you have to figure it out yourself.

Part of it comes down to temperament. Some of us are best suited to be mutual fund investors, while others are best suited to stocks. Others can start with bank deposits, transition to mutual funds and then to stocks. In fact, and this is very important – even for stock investors, it makes sense to use mutual funds for tax savings and the fixed-income part of their investments. So it’s a question where the answer is not universal.

Still, the main point is undeniable: unless you are an expert investor or can put in the time and effort to become an expert, it does not make sense to invest in equities directly. Therefore, the choice is relatively straightforward for every beginner – without exception – you must invest through mutual funds. I’m not suggesting even for a moment that an individual can’t be successful in investing directly in stocks.

However, for a beginner, the odds are not favourable. An even bigger problem is that even those few would have probably started tasting success after many failures, and each of these failures would have landed them with some losses. This business of learning through failures turns out to be a deal breaker for most of us, whose goal is to earn more money from their savings simply.

Mutual funds deliver basic requirements like diversification effortlessly. Being able to start investing in small and flexible chunks is another significant advantage. If you try to build a diversified portfolio with stocks by buying them directly, you’ll need a relatively large sum of money – at least a few lakhs. You can start by owning the same with a few thousand rupees in mutual funds. You can invest regularly and automatically with a fixed amount every month. You can save tax under section 80C by investing up to Rs 1.5 lakh a year in designated equity mutual funds.

All equity portfolios need buying or selling as individual stocks become more or less desirable. These transactions will mean a tax liability if you are trading stocks yourself. However, in an equity mutual fund, this trading is done by the fund manager inside the fund. You don’t have a tax liability because you haven’t made transactions yourselves. There’s a further multiplier to the tax saved because the money stays available as an investment and thus gains even more. This can make a massive difference for long-term investments that compound over the years.

Sometimes, in the media, the stocks-vs-funds question is framed as a return comparison, generally by comparing average mutual fund returns with benchmarks. However, this is a meaningless comparison because returns are just one small part of the picture. Either of the two asset classes could be more suitable for you, but many factors must go into the decision.