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The way financial services and investment products are made accessible these days has changed due to technological advancements. Almost all financial activities and investments may now be completed online. While this is a wonderful shift, it has also brought with it a slew of possibilities and challenges. One of them is cryptocurrencies. Let's start with a definition of cryptocurrency.
Cryptocurrencies are digital assets that may be used as a form of payment between cryptocurrency owners. All cryptocurrency transactions are recorded in ledger format on databases linked by a network utilising blockchain technology. As a result, cryptocurrencies are not issued by a central bank and do not exist in physical form. As a result, cryptocurrencies are not accepted as currency in India. Their actual status, i.e. whether they should be classified as money, an asset, a stock, or a commodity, is unknown since the RBI or any other Indian regulatory authority has yet to acknowledge them.
While cryptos have numerous benefits, such as transparency, portability, divisibility, and wonderful investment potential for those willing to take a chance, there are some cryptocurrency hazards to be aware of. Even though the Indian government has not prohibited cryptocurrency, there is no regulation in place that clarifies their legal position. As a result, it is a nebulous asset class. It is, without a doubt, one of the most volatile investments available. Because cryptos allow monies to be transferred between two people without going via a bank, they may be used for money laundering and fraud. Small and uninformed investors might quickly lose money if there are no government controls in place.
It is always better to put your hard-earned money into well-regulated investment products like mutual funds, equities, bonds, and insurance than cryptos, which are popular but not controlled by any government body. They lack legal legitimacy and are very unpredictable, and they also lack clear taxes laws that specify how your gains will be taxed. If mutual funds seem perplexing, cryptos will be much more so, since there aren't many experts covering this asset class in depth to assist you to grasp how to value them for investing purposes or if you can depend on them for your financial goal planning.
Mutual funds have been around for a long time, give investor protection via the existence of SEBI as the regulator, provide a wide range of selections based on your financial goals, are easy to follow, and provide regular disclosures to assist investors to make educated decisions. They also have channels for resolving complaints. All of these elements contribute to the development of investor trust. Cryptocurrencies lack such protections, making them dangerous investments for your life savings.
Before investing your hard-earned money in cryptos, mutual funds, or any other asset, it's a good idea to weigh the advantages and disadvantages honestly. Conduct your research to determine if a certain asset class or investment product is a good fit for your risk profile and expected returns. If you can't make this choice on your own, get assistance from a SEBI-registered financial advisor/mutual fund distributor, but don't make these decisions on the spur of the moment or based on news headlines. Investment decisions are made for the rest of one's life, so it's worth devoting considerable thought to them.
Benefits of Cryptocurrency
Cryptocurrencies are decentralised, which means that the government cannot control them (unlike fiat currency which can be printed to increase liquidity or interest rates manipulated to reign in liquidity). They offer reduced transaction costs, can transmit funds quicker, and are regarded more safe and private since no banking institution is involved.
Many tokens/cryptocurrencies have achieved gains of 1000 per cent or more in a couple of days, which no other asset class can match. As a result, these tokens have developed a reputation for being effective inflation hedges.
Cryptocurrencies are hailed as the money of the future. The value of the majority of cryptocurrencies has yet to be determined. Having them in your portfolio might be advantageous in this situation.
Cryptocurrency's disadvantages
The main downside of cryptocurrencies is their widespread usage in terror financing, making it difficult for law authorities to follow illegal activity. It is for this reason that the vast majority of governments are apprehensive of this asset class.
The asset class's second key drawback is that it is exceedingly hazardous. Crypto markets have seen corrections of up to 60% to 70%. Furthermore, large money, celebrities, and online groups are expected to heavily influence the markets.
Cryptocurrencies are also harmful to the environment since mining requires a lot of electricity and leaves a carbon imprint. Finally, this sector is very vulnerable to online fraud and hacking. Because it is unregulated, no one can be held accountable in the event of fraud or theft.
Benefits of Mutual Funds
Because mutual funds vary across equities, sectors, and asset classes, they can effectively limit your risk. They are overseen by specialists who are well-versed in the industry and its subtleties. Fund managers provide excellent research and administration of your portfolio, saving you time and effort. Not to mention the expertise you'll have access to.
These funds enable you to earn stock-market-like returns while dramatically lowering your risk. Furthermore, the majority of these funds are tax-advantaged.
Mutual funds have a number of drawbacks.
Expense ratios in mutual funds may be high, which can cut into your gains. Profits may be diminished since the fund is diversified. In the case of closed-ended funds, the lock-in period might also be longer.
Which is the best option for you?
The degree of risk that people are ready to accept when determining whether to invest in cryptocurrencies or mutual funds is the most important issue to consider. Cryptocurrencies carry a much greater level of risk than mutual funds.
While mutual funds are vulnerable to market risks and others, cryptocurrencies, as described above, are subject to a wider spectrum of dangers. Since mutual funds have been around for a long time, there is a lot of information accessible about them.
Cryptocurrencies, on the other hand, are a relatively new idea, and there is a lot of disinformation in the market about them.
Furthermore, many nations, including India, have a long way to go before cryptocurrencies are recognised as legal tender.
While some think that cryptocurrency will take over the world, others say that it is a speculative bubble that may explode at any moment.
Conclusion
The discussion between mutual funds and cryptocurrency is fascinating. Before investing in any asset class, it is necessary to have a defined investment aim. Cryptocurrencies may be a viable option if the risk is not your major worry and you can tolerate high volatility. Investing in mutual funds, on the other hand, is a good option if you want consistent returns and risk control. Whatever you decide to invest in, you must undertake thorough research and choose the investment that best meets your risk appetite and overall financial objectives.