Difference Between Shares and Mutual Funds: Which is Better?
Difference Between Shares and Mutual Funds: An Overview
Mutual Funds and Shares have become the most popular investment avenues available to people. According to recent data, 31% of Indians are investing in Mutual Funds, whereas 10% are investing in shares in 2022. It is essential to have proper knowledge of all the investment avenues available and then make an informed choice. There are a lot of debates every day over the stock market vs mutual funds and which one is a better investment avenue. This article will simplify the battle of mutual funds vs the share market and provide the readers with optimum information to make a sound decision and maximize their returns by answering the common question: Which is better Mutual Fund or the Stock market?
What is a Share?
In simple words, Shares represent the unit of holdings in equities of a company. The people who own the shares are known as shareholders and own a small part of the company whose shares they hold. One can buy shares directly through trading apps or brokers.
People these days are willing to explore various investment avenues to try and maximize their returns. Shares are a great option available. A lot of people wish to have a business of their own but due to some reasons they do not end up with one, shares give them a chance to invest in the businesses of different people and represent their interests/views.
In India, the share market is regulated by the Securities and Exchange Board of India (SEBI) under the SEBI Act 1992.
One can invest in shares through Initial Public Offering (IPO) or the secondary market. It is a basic exchange in which the main owner of the company gets capital to grow the business and the investors get a small part of ownership in the company. The investors benefit when the company grows. They simply invest because they trust in that company and see potential growth. When the company grows, more people are willing to buy the shares and hence the demand rises and so do the share prices. And this is how the investors benefit as the price of their shareholdings increases and they earn profit. As companies grow, they also earn profits and majorly invest them back in the business, whereas some can be distributed to the shareholders in the form of dividends.
Earlier, these shares were issued in materialized forms of certificates but now everything has turned dematerialized and so has the ownership of these shares. One needs to open a Demat and a trading account in an investment platform to invest in shares.
What is a Mutual Fund?
Mutual Fund is an investment avenue in which the Fund Houses provide a service of managing the investor's money by pooling the money of like-minded people with the same investment purpose and investing this collected amount in different investment avenues such as equities and bonds. Here, a professional Fund Manager manages the money of several investors. The fund manager has an in-depth knowledge of the market and invests in various assets only after conducting proper research. And for this service by the fund managers who have expertise in this alma matter, the fund house charges a small amount, which is a small percentage of the total investment of a person, called an expense ratio or management fees, which is generally between 1-3%.
Mutual Funds can be categorized into various types but the three main types of Mutual Funds are:
- Equity Mutual Fund: the entire amount is invested into equities of various companies and various caps (Large cap, Mid cap, and Small-cap) to provide diversity to reduce the risk.
- Debt Mutual Fund: The entire amount is invested in debt funds, which are government securities and other low-risk securities.
- Hybrid Mutual Fund: As the name suggests, it is a combination of the above. A part is invested in equities and the other is invested in various debt funds.
There are many Mutual Funds made for various investors as all investors are different, have different investment purposes, a different time horizon to invest their money in, and different risk appetites.
Hence, there is no best Mutual Fund. One needs to compare all of the Mutual Funds and check factors such as Net Asset Value (NAV), Assets Under Management (AUM), fund performance, expense ratio, and the fund manager’s experience among other things to make an informed decision.
After assessing the above factors, one can invest in Mutual Funds in a lump sum amount or a Systematic Investment Plan (SIP).
Difference Between Shares and Mutual Funds: Which is Better?
To solve the debate about Stocks vs Mutual Funds, one needs to know the difference between the two and decide whether to invest in Mutual Fund or Stock Market.
The following are a few of the differences one should be aware of:
- The investment in shares is managed by the investor himself, whereas the investment in mutual funds is managed by a professional fund manager.
- While investing in shares, the investor needs to research on his own, whereas in mutual funds, the fund houses manage this part too. Thereby mutual funds can save time for the investors.
- In shares, an investor has to invest in individual shares and has the option to invest in multiple shares of his own choice. Whereas, in mutual funds, the whole amount is invested in a diversified set of assets based on the investment purpose and goals of the investors.
- Shares are subject to market risk. So are mutual funds but the risk is reduced as the amount is invested in various assets.
- While investing in shares, you can only invest in shares and own a part of the respective company. Whereas in mutual funds, you can invest in various assets like bonds too. Hence, diversification is offered in investing in Mutual Funds.
- Since fund houses are such big participants in the market, they have more reach and knowledge than a common person who is investing in shares by himself.
- Investment in shares requires a lot of money at times as the shares can be priced higher due to market forces. Whereas, mutual funds give you a chance to buy a part of the same company as the fund house combines the money of various investors to invest in diverse investment avenues.
- Investing in shares gives you a chance to follow your form of investment and even go against the flow.
- You can invest in a SIP in Mutual Funds, whereas you can not do that in shares as the price of shares keeps fluctuating, and hence your amount of investment will vary.
- You choose the stocks to invest in while investing directly, but you do not have that option while investing in Mutual Funds.
- Investing in shares gives you freedom and helps you gain a lot of knowledge as you are the driver of your investments.
- Investing in Mutual Funds helps you achieve your long-term goals by letting a professional fund manager manage your investment.
- Both forms of investment avenues have their pros and cons and are both great options available to an investor.
- Share market vs Mutual Fund is an interesting topic and one should consider both options.
Is Mutual Fund Better Than Stocks?
Now that we have assessed Mutual Funds vs Stocks, it is time to answer the question: “Mutual Fund vs Share market- Which is Better?”
Both of these investment avenues are great options and offer different features.
One offers freedom, whereas the other offers a professional opinion.
One offers ownership in companies, whereas the other offers diversity.
Mutual Fund vs Share Market is an interesting debate topic and can also turn out into a never-ending one.
It all boils down to the investor and what they are looking for.
So, there is no correct answer to the above question.
One needs to get a piece of proper knowledge about both investment avenues, and then make a decision and invest wisely. After comparing.
Every investor is different and so is their form of investment. It depends on the investor what features he wants to avail and choose the right investment avenue based on his investment purpose, the timeline of investment, and the amount of risk he is willing to take.
This article has tried to give a clear picture of both the investment avenues and after comparing both of these, one should ask himself which investment avenue matches his goals and would benefit him more.
And then invest in it wisely.
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Which is riskier: Shares or Mutual Funds?
Since Mutual Funds provide diversification, and shares are subject to market risk as the price keeps fluctuating, it makes the direct investment in shares riskier comparatively. Although shares are a great option to consider for high returns.
What is the minimum amount that needs to be invested in shares and Mutual Funds?
In shares, the minimum amount directly equals the current price of the stocks you are looking to buy, whereas, in Mutual Funds, you can also start by investing just Rs.100 in the SIP form of investment.
Are Mutual Funds affected by the stock market?
Yes, Mutual Funds are affected by the stock market. They are also subjected to market risk as if you are investing in Equity Mutual Fund or Hybrid Mutual Fund, a part of your investment is getting invested in equities and the price can fluctuate based on market fluctuations. Although, the risk is reduced as the amount is invested in a diverse group of funds.