Mutual funds and stocks are two very different concepts and people often misconstrue them to be the same. If you are entering the financial market, you have two options to invest. Either you can choose to invest in equities directly through the stock market or you can choose the indirect route of investing in equities through the mutual funds. In this article, you will learn about the difference between shares and mutual funds.
Before learning about mutual funds vs. stocks, let us understand the meaning of each term.
What are Shares/Stocks?
Shares or stocks are issued by the company through IPO (Initial Public Offering) to raise money for expansion and other purposes. These stocks can be bought or sold through demat or trading account. After the listing of shares on the stock exchange through IPO, these shares are available to the public in the secondary market. Depending on your future goals, you can invest in companies by purchasing their stocks for long term. By investing in stocks you get the benefit in the form of price appreciation of stock value when the company performs well.
Let us now learn about what are mutual funds.
What Are Mutual Funds?
Mutual funds are professionally managed investment funds that collect money from different investors and invest them to purchase shares or securities. You can invest in the mutual funds by opting either the lump sum mode or the SIP mode. The returns generated on mutual funds are distributed to you in proportion of mutual fund units held by you.
After understanding the meaning of both the terms, let us understand the difference between mutual fund and share market stocks.
Difference Between Shares And Mutual Funds
• When you invest in mutual funds, the money is pooled by the investment managers and invested in shares or securities of different companies. This provides diversification to your investment. On the other hand, this type of diversification is not possible when you make the investment in shares or stock market directly.
• When you invest in shares directly, it is your responsibility to do an analysis of a company, its price, its future prospects, etc. While on the other hand, when you invest in equities through the mutual funds you get the assistance of professionals who carry out all the necessary research before investing your money in shares.
• When you invest in shares of a company, you become a part of their growth story as you are now its shareholder. You will also get dividends if the company performs well. But, in the case of mutual funds, you purchase their units and therefore, you are in no way connected to the growth or progress of an individual company.
• Investing in shares directly can be a little risky because the whole exposure is towards a single company. In case of mutual funds, your money is invested in various companies which mitigates your risk.
• Investing in equities directly can time consuming as it requires good research of the companies. On the other hand, investing in mutual fund is very easy and simple. All you need to do is find a good mutual fund company and invest your money.
• Mutual funds are maintained by the fund managers. Here you do not have the option of changing the stocks present in the portfolio. On the other hand, when you invest in shares directly, you can easily sell stocks from your portfolio and buy shares of any other company.
• Demat account is the primary requirement to invest in shares. Without a demat account, you cannot purchase or sell shares or securities in the Indian financial market. Whereas in the case of mutual funds, you do not require a demat account and you can invest in them directly.
• Mutual funds can give you higher returns if you stay invested in them for a longer period of time. But in the case of investing in shares, you can trade or even make short term profit with the right strategy of buying, selling or holding any stock.
• Investing or trading in shares involves brokerage charges. Whereas in the case of mutual fund investment, the charges include management fees, entry load, exit load, etc.
The above mentioned are a few of the differences between investing in mutual funds vs. stocks. The next question about mutual funds vs. stocks that might arise in your mind is that among stocks or mutual funds, which is better. In this section of the article, we will resolve this dilemma.
Stocks or Mutual Funds - Which is Better?
Whenever there is a debate on investing in mutual funds vs. stocks, there is always a common question in everyone’s mind that among these two options, which one is the best. Here you need to understand that both these investment options are very different from each other. You must invest in that option which suits your style of investing and risk appetite. If you are fine with taking risks, you can invest in stocks directly. But on the other hand, if you are a conservative investor and do not want to take risks, mutual funds is the right bet for you.
Therefore, selecting any investment option among these two as the best would not be justified because it is the individual’s preference and style of investment that matter the most. If an individual has a clear financial goal in his head than whatever option he selects among the two that would be the best for him.
So by looking at the differences between mutual fund and share market, it would not be wrong to say that both the investment options are good in their own ways. If selecting an investment option among these two is a big dilemma for you, then you can contact IndiaNivesh Ltd. We are the leading financial broking firm in India. Our advisors understand your financial goals and based on that suggest you the right investment option. Our experts and professionals help you in selecting the best mutual funds for investment. In addition, you can open a demat account with us and invest in shares on the basis of our regular research reports.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing