Shareholders vs mutual fund investors: Understanding the difference

In the investment arena, the role of ownership between shares and mutual fund shares varies widely. When you own a stock in a company, you will gain a tangible ownership stake with associated rights. On the other hand, in mutual funds, you will acquire a share in a collective pool of assets, and it is not a direct ownership.

Mutual fund investment allows you to benefit from asset performance without bearing the responsibility of managing the asset. The Asset Management Company (AMC) launches multiple mutual fund schemes with different investment objectives. A professional fund manager manages and operates the mutual fund in the interests of the investors, enabling you to focus on your investment growth.

This article will highlight the difference between shares and mutual funds, allowing you to understand the right investment avenues.

• Table of contents

1. Definition and types of mutual funds
2. Understanding shareholders and their types
3. Difference between shareholders and mutual fund investors

Definition and types of mutual funds

A mutual fund is an investment option where an AMC pools money from investors and invests it in diverse assets such as stocks, bonds, securities, etc. Investors, through mutual funds, achieve portfolio diversification, gaining access to a wider range of assets. Shared ownership of the fund's various assets dilutes risks while enhancing exposure to a broader market. Based on the underlying assets, mutual funds are classified into the following types:

• Stock funds–Involves investing in equity or stocks categorized by company size – small, mid, large, and cap, and approach – value, growth, or blend.
• Bond funds– Focuses on generating a fixed income through corporate or government bonds with multiple variations. High-yield funds carry a high risk.
• Index funds– Follows significant market indices and provides broad market exposure. Cost-sensitive investors prefer index funds as they are not expensive.
• Money market funds- Money is invested in short-term, low-risk debt instruments. Low impact on capital is the main priority, so you can expect modest returns.
• Income funds- Ideal for investors and retirees, this type of investment involves investing in high-quality corporate and government bonds.
• International/global funds-Provides portfolio diversification by investing in funds with a broader geographical scope.
• Specialty funds-Specific to industries or regions in funds that adhere to ethical guidelines, these funds are suitable for socially conscious investors.
   

Read More: Types of mutual funds in India

Understanding shareholders and their types

A shareholder is an individual, company, or institution that owns at least one share in a company. The ownership stake is determined by the number of shares they hold relative to the company's total number of outstanding shares.

Types of shareholders

There are several types of shareholders, each with different roles, rights, and responsibilities. Some broad categories are:

• Individual shareholders: These are private investors who buy shares in their personal capacity. They can purchase shares through brokerage accounts or directly through company offerings.
• Institutional shareholders: These include entities like mutual funds, pension funds, insurance companies, and banks. They typically hold large quantities of shares.
• Preferred shareholders: Owners of preferred shares have the potential to earn regular dividends and have priority over common shareholders in the event of liquidation. However, such shares have limited capital appreciation potential.
• Common shareholders: These are the most common type. Owners of common shares have voting rights and can benefit from the potential rise of the company’s stock value, but they are given lower priority when it comes to dividend payouts and other assets.

Shareholders vs mutual fund investors

The AMC uses investors' funds to invest in a diversified collection of bonds and stocks and uses strategic investment decisions to manage the pool of assets. Shareholders invest in shares of specific companies directly using the equity market. While mutual fund owners gain part-ownership of the fund, they don't have ownership of any company. The differences are summarized in the table below:

Conclusion

Investors in mutual funds and shareholders get returns based on company performance. Shareholders possess company shares, enabling participation in decision-making. Understanding the difference between shares and mutual funds aids in navigating the financial market and selecting investments aligning with your financial goals.
If you want to become a mutual fund investor, Bajaj Finserv AMC offers different types of products that suit your budget. Explore our Fund and systematic investment plan (SIP) options to choose the right scheme for you. You can also use free online tools such as SIP mutual fund calculator for help with planning your investment approach.

FAQs

Who are mutual fund investors?

Mutual fund investors are individuals or entities who invest in mutual funds. The investments from multiple investors are pooled and managed by professionals, gaining access to diversified portfolios and potential returns.

Why is ownership of a mutual fund beneficial to investors?

Ownership of a mutual fund through holding shares provides investors with diversification, professional management, and the potential for capital appreciation. It allows them to participate in the fund's performance and provides liquidity through the ability to buy and sell shares.

What is the role of an investor shareholder?

An investor shareholder holds a stake in a company through owning shares, contributing capital, and sharing in the fund's gains or losses. Their role involves participating in distributions and dividends based on the company’s performance.

What do you understand by owners or shareholders?

A shareholder is the owner of shares or stock of any company. Their ownership share is based on the number of shares they have purchased. They are entitled to dividends based on the company's performance. Certain stockholders can also gain a seat on the company's board of directors.

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 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.