Mutual Funds Vs Equity: Which is a Better Investment?
Mutual Funds Vs Equity: An Overview
Investments in equities and mutual funds are rising at a rapid pace in 2022. It is imperative to have proper knowledge of all the investment avenues available to an individual and then make an informed choice. The debate of equity vs mutual funds is going on for a long time now. A lot of people are investing in them, but still, there is a part of the population who are still looking to gain knowledge in this field. This article will not only tell you about what these are but will also simplify by mentioning the difference between equity and mutual fund. This article will also shed light on the debate of mutual funds vs equity shares and tell you which one is a better option for you to invest in.
What is Meant by Equity in Share Market?
In simple words, Equity is the total amount of money that an individual has invested in a company. The company can be his own, or someone else’s. There is a difference between equities and shares. Equities is the amount of money invested, whereas 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 stocks with the help of trading apps or brokers.
In India, the Securities and Exchange Board of India (SEBI) regulates the share market under the SEBI Act 1992.
One can invest in equities through Initial Public Offering (IPO) or the secondary market.
To invest in equities, one needs to open a trading and demat account while following other legal obligations like pairing your pan card, etc.
Investing in equities takes a lot of research and time to make sound decision. One should go through the company’s past records, financial statements, board members, field of operation, scope of growth of company, and other things before investing in its equities.
Equities offer a high rate of return, if invested wisely, and for a long term. They even offer short term high returns, with a bit risk in hand.
What is a Mutual Fund?
Mutual Fund is a scheme offered by various Fund Houses that provide a service of investing the money of like minded people with same investment purpose, by pooling their money and investing this collected amount in different assets such as equities and bonds. This pooled money is managed by a professional Fund Manager. The fund manager, with his in-depth knowledge and research of the market invests this money in a diverse set of assets. And for this service with expertise of fund manager, the fund house charges a small portion of the total investment of the individual, called an expense ratio or management fees, which is generally between 1-3%.
Mutual Funds can be mainly categorized into three types which are as follows:
- Equity Mutual Fund: Investment in Large-cap, Mid-cap, and Small-cap equities.
- Debt Mutual Fund: Investment in government securities and other low-risk securities.
- Hybrid Mutual Fund: Investment in both, equities and debt securities.
Investments in Mutual Funds can be made in a lump sum amount or a Systematic Investment Plan (SIP).
Difference Between Mutual Fund and Equity
One needs to know the difference between the two to solve the debate about Mutual Funds vs Equity. The difference between equity and mutual funds are as follows:
- Ownership: In the case of mutual funds, there is no form of ownership by the investor, whereas in equities, the investor owns a share of the company.
- Investment Management: In the case of mutual funds, the investments are managed by the fund manager, whereas in the case of equities, the investments are managed by the respective individual or his broker.
- Risk: Equities carry a higher risk than mutual funds as the investment in mutual funds is diverse and hence the risk is spread amongst all the investors. Also, equities are directly affected by market fluctuations, thereby increasing the risk.
- Research: The research in mutual funds investment is done by the fund manager of the fund house, whereas, the broker or the investor himself has to research the market and the companies before investing, which is time-consuming.
- Investment assets/diversity in investment: In terms of equities, the entire amount is being invested in the equities of the respective company, whereas in terms of mutual funds, the amount is split between various assets such as multiple equities, government securities, and other assets. Hence, mutual funds offer diversity.
- Freedom: Investing in equities offers the investor complete freedom in decisions based on his investments. The investor can enter and exit his positions as and when he wants, and can invest in equities of his own choice. Whereas, in mutual funds, the decisions are left to the fund house and the investor has no rights on which equities/securities to invest in.
- Mode of payment: One can invest in the form of SIP in Mutual Funds, whereas one does not have that option in equities as the price of equities keeps fluctuating based on the market fluctuations, and hence the amount of investment will vary.
- Returns: Mutual funds offer a decent return in the long term, whereas equities can offer high returns even in the short run if invested wisely.
- Volatility: The prices of equities are more volatile as compared to mutual funds.
- Cost: Both forms of investments have some costs. Equities carry entry and exit load, whereas mutual funds carry expense ratio.
- Investing in equities offers freedom and helps one gain a lot of knowledge in the respective field of investment.
- Investing in Mutual Funds offers you to achieve your long-term goals and fund management by a professional fund manager who has the expertise and in-depth knowledge of the market.
- Both forms of investment avenues have their pros and cons and are both great options available to an investor.
Mutual Fund Vs Equity: Which is Better?
Now that we have assessed equity and mutual fund differences, we can answer which one is a better choice for an individual.
As mentioned in the article above, both of these investment avenues are great options and offer various features. One offers high returns with high risk, while the other offers good returns in the long run with less risk.
It all boils down to the investor, based on their investment purpose, goal, risk appetite, and time horizon of investment.
Hence, there is no one answer to the above question for all the investors.
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: Equities or Mutual Funds?
As mentioned in the article above, equities carry higher risks as compared to mutual funds as they are directly affected by market fluctuations. And as mutual funds offer diverse investments, the risk associated with them is also spread amongst all the investors.
What is the minimum amount that needs to be invested in Equity and Mutual Funds?
In the case of equities, the minimum amount of investment equals the current price of the stock you are going to buy, whereas, in Mutual Funds, investing can start from as low as Rs.100 in the form of a Systematic Investment Plan (SIP).
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.