Should you invest in gold funds or gold ETFs to build an emergency fund?

I am a retail investor who has decided to invest an amount equivalent to six months' salary in gold for emergencies. What's your opinion on this? - Anonymous

While gold is considered a safe haven during economic instability, it isn't well-suited for building an emergency fund. This is because gold is an inherently volatile asset.

This is evident from the graph, which shows the returns earned by gold mutual funds over any three-month period in the past decade. The returns range from as high as 24 per cent to as low as negative 13 per cent. This unpredictability doesn't align with the stability required for an emergency fund.

To build an emergency fund, you should invest in assets that provide moderate yet stable returns. Thus, liquid funds seem ideal. These funds come with low risk and no lock-in - qualities essential for emergency savings. So, a few well-chosen liquid funds would be a better place to help build an emergency corpus.

In times of currency instability or economic turmoil, gold is valuable, as it helps protect your wealth. Some investors also allocate a portion of their long-term portfolio to gold, which often acts as a hedge against equity, performing well during significant stock market declines. Therefore, gold can have a role in a diversified, long-term portfolio, for the same but it's not suited for creating an emergency fund.

Also read: How can a three-layered emergency corpus help you ride out emergencies?

This article was originally published on October 31, 2024.