Difference Between Shares & Mutual Funds
As we have various life goals, to achieve these, planned investment is necessary. One has to follow the principle of diversification and invest in a wide range of assets so as to get better and risk adjusted returns.
Whether to invest in mutual funds or shares depends on an individual’s needs and risk appetite. If an investor is a high risk taker, he can invest directly in shares; But for some other investor who does not take risk, mutual fund is the preferred route to invest in equity as the risk is not high. Some of the investors have confusion regarding mutual funds versus shares. It is highly important to understand the difference between shares and mutual funds and then decide on the suitable investment mode according to one’s income, age, goals, time horizon, etc.
What are shares?
Shares are those issued by companies by means of IPO (Initial Public Offering) to raise money for their expansion plans or other objectives. These can be bought or sold if you have a demat and trading account. After IPO, the company gets listed on the stock exchange. Thus, the company’s shares are available to the public in the secondary market. You can be a long or short term investor depending on your objectives. When the company grows, the value of its shares too increases. So, if shares are held for a long term, one get benefitted by selling it.
What are mutual funds?
Mutual funds are pooled investments wherein investors’ money is invested in selective shares or bonds after careful research by fund managers. The returns generated from these investments are given to investors. One can either take the SIP mode or lump sum mode to invest in the mutual funds. Regular monitoring of mutual fund’s performance is very important.
Let us now look at the difference between shares and mutual funds in detail.
Mutual Funds vs. shares:
- When you invest in mutual fund, your money is pooled and then invested in shares, bonds, etc. of several companies. That is, there is diversification but this is not possible if you invest in shares directly.
- Mutual funds are managed by professionals and all necessary research is done by them whereas if one invests in shares, it is the responsibility of the individual to do proper research about the company, price movement, etc.
- Mutual funds are sold as units and you are in no way connected with the growth story of the company whereas when you invest in shares, you become a shareholder of the company and may get dividends or profits if the company performs well.
- Risk gets mitigated in case of mutual funds as your money is invested in various companies but this does not happen in case if you directly invest in shares.
- Investing in mutual fund is easy. On the other hand, investing in equity needs more of your time and research.
- When you invest in mutual funds, you have no option of changing the stocks in your portfolio as it is completely maintained by the fund managers. While investing in shares, you can exit from a stock and buy some other stock anytime.
- To invest in mutual funds, you don’t require a demat account whereas to invest in shares, you need a demat account.
- To get better and higher returns, one has to stay invested in mutual funds for a longer time period. While investing in shares, if you are a trader or a short term investor, you can get better returns quickly if you use the right strategies of sell, buy or hold.
- Mutual funds have several other chargers like entry load, exit load, management fees, etc. When you invest or trade in shares, brokerage charges are applicable.
One has to clearly understand the differences between mutual funds vs stocks before investing in the stock market. With clear financial goals in place and with proper asset allocation, anyone can achieve their life goals.