Understanding the key differences between shares and mutual funds

In the ever-evolving world of investments, two popular options often come into focus: share and mutual funds. While they both offer opportunities to grow wealth and participate in financial markets, they differ significantly in their structure, mechanism, and potential outcomes.

Whether you’re a seasoned investor or a curious beginner, it’s essential to understand the factors that set these two investment vehicles apart. By understanding the difference between shares and mutual funds, you can make informed decisions regarding your investment.
But before we get into the difference between shares and mutual funds, it is important to understand them individually first.

What are shares?

Shares represent a unit of ownership in the capital of a company. The ownership also entitles you, as a shareholder, to the profit as well as loss of the company. You can buy the shares of a company directly from your Demat account. Your stake in the company can be directly calculated by the number of shares you own as compared to the total shares of the company. Investors also bear the cost of trading and manage the owned shares themselves. In addition, investors must also find new companies to invest in regularly to diversify the portfolio and mitigate risk.

What are mutual funds?

A mutual fund is an investment vehicle that invests money in different types of securities such as stocks, bonds, and short-term debt in companies across different industry sectors. It pools money from different investors to purchase the securities. A key difference between shares and mutual funds is that investors do not need to manage this investment since a mutual fund is managed by fund managers. Moreover, the need for diversification is eliminated when you compare investing in MF vs shares, since a mutual fund invests in different securities across various sectors and companies.

Difference between shares and mutual funds

Now that you know what are shares and mutual funds, you will be easily able to find the difference between shares and mutual funds. It will also help you know which of these is more suitable for you.

Investment knowledge: An important difference between shares and mutual funds is that you need to have a comparatively better knowledge of investing when you buy shares of a company. This is because you need to take buying and selling decisions based on price movements to turn a profit. On the contrary, since mutual funds are managed by experienced fund managers, even novice investors can reap the benefits of investing in mutual funds. The only thing an investor needs to do is find a suitable mutual fund scheme. They can also seek the help of a distributor for the same.

Risk level: Mutual funds are comparatively less risky than shares. This is simply because of the level of diversification and professional management offer by mutual funds. Many investors choose to buy stocks because they want to have control over their investment forgetting that it also exposes their investment to more risk.

Potential returns: Your potential of earning returns is better when you directly invest in the shares of one or more companies. The diversification offered by mutual funds, which aims to lower the risk factor, slightly affects your earning potential since the highs of some securities are absorbed by the lows of others. However, you must note that shares are typically considered to be relatively riskier than mutual funds.

Time spent: One of the major points in the shares vs mutual funds discussion is the amount of time you need to spend researching different stocks and then buying or selling shares depending on the market conditions. However, if you buy mutual funds, you can stay invested in the short, medium, or long-term basis your investment horizon. The fund manager will manage the fund on your behalf. You only need to monitor the performance on a regular basis.

Investment amount: You need a sizeable amount to invest in stocks. You may also have to diversify your portfolio by investing in shares of multiple companies. However, you can start with as little as Rs.1000 to invest in mutual funds through Systematic Investments Plans (SIPs). These plans allow you to get mutual fund units at periodic intervals to start building your portfolio even if you do not have a large sum of money.

In conclusion, both shares and mutual funds have the potential to generate inflation-beating returns over long term. The main difference between mutual fund and share market investment is your level of involvement. If you invest in a mutual fund, you can sit back and let the fund manager handle your money and generate returns. But if you directly invest in the share market by purchasing stocks, then you need to monitor your investment frequently to buy or sell stocks.

FAQs:

Are mutual funds called shares?

No, mutual funds are not called shares. Mutual funds are investment vehicles that pool money from multiple investors to invest in diversified portfolio of assets such as stocks, bonds, or other securities. The ownership in a mutual fund is represented by units, not shares.

Which is more profitable shares or mutual fund?

Comparing the profitability of shares and mutual fund is challenging as it depends on multiple factors such as market conditions, individual stock selection, and fund performance. Both shares and mutual fund can be profitable, however, mutual funds offer diversification and professional management, which can mitigate risk and potentially seek to generate long-term returns.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.