Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
Two of the most sought-after financial instruments in the Indian stock market are shares and mutual funds. They both offer the benefit of capital appreciation and are great ways to invest for long-term wealth creation. But then, which one of these two types of securities do you invest in?
Now, before you decide the kind of investment option that’s right for you, it is crucial to ensure that you’re aware of the difference between shares and mutual funds. Analysing the dissimilarities between the two options can help you make a more well-informed investment decision.
Also Read: What is Pure Play?
Table of Content
Shares, also known as equity shares, are units of ownership in a company. Investors who hold equity shares of a company are termed equity shareholders and are considered collective owners. The more shares an investor holds, the greater their ownership in the company.
Since equity shareholders are considered owners of a company, they get certain rights and privileges. This includes the right to vote on business matters and the right to receive a part of the company’s profits in the form of dividends.
In addition to equity, a company can also issue another type of share known as preference shares. These are not as common as equity and don’t offer the right to vote. However, in exchange for giving up their voting rights, preference shareholders get the right to receive a fixed rate of dividends.
What are Mutual Funds?
Now that you’ve seen what shares are, let’s quickly look at mutual funds before we compare mutual funds vs. shares.
Mutual funds are unique investment vehicles where money from a large number of investors is pooled together and invested across multiple assets. Depending on the mutual fund, its theme and objective, the funds may either be invested in stocks of different companies, debt instruments or a mix of both.
Unlike stocks, mutual funds are created by Asset Management Companies (AMCs) that employ dedicated teams of experienced professionals known as fund managers. The primary objective of fund managers is to ensure that the mutual fund performs well under different market conditions. They do this by constantly monitoring the fund’s performance and making adjustments by way of increasing or reducing the stake in the various invested assets.
Moving on to the main part of the article, both shares and mutual funds have a lot of dissimilarities between them. Understanding what they are is key to becoming a better investor. So, here’s a tabulated comparison of some key differences between these two investment options.
| Particulars | Shares | Mutual Funds |
| Ownership | Purchasing shares makes investors owners of the company, allowing them to vote on certain company matters | Mutual fund unitholders are not owners of the companies they invest in and don’t get the right to vote |
| Investment | Investing in shares is a form of direct investment since you’re the one who selects the stock to invest in. | Mutual funds are a form of indirect investment since it is the fund managers who are responsible for curating the investment portfolio |
| Diversification | You don’t get the benefit of diversification when you invest in the stock of a company | Since the funds invest in a basket of different assets, you automatically get the benefit of diversification with mutual funds |
| Risk | Investing in shares is considered to be highly risky since they’re very susceptible to market volatility | Due to the diversification factor, mutual funds are not as risky as individual stocks |
| Management | Investors are responsible for managing their stock investments | Dedicated and experienced fund managers are responsible for managing mutual fund investments |
| Liquidity | Shares are very liquid, which makes it easy to purchase and sell in the market | Mutual fund units are not as liquid as shares |
| Cost | The transaction costs associated with purchasing and selling shares are very nominal | The costs associated with mutual funds can be expensive compared to stocks |
| Returns | The returns produced by stocks are usually higher than those of mutual funds | The returns provided by mutual funds usually tend to be lower than stocks |
| Ideal For | Shares are ideal investment options for experienced investors | Mutual fund investments are ideal for beginner and inexperienced investors |
Conclusion
With this, you must now be clear about the difference between shares and mutual funds. If you’re a beginner planning on investing in the stock market, mutual funds may just be the option for you. They’re mostly professionally managed by experienced fund managers, eliminating the need to perform financial or fundamental analysis on your part. Furthermore, since mutual funds invest in a basket of different stocks or assets, you get the benefit of diversification. Diversification allows you to reduce your overall portfolio risk and may protect you from losses due to adverse market events.
That said, if you’re an experienced investor, you could consider investing in individual stocks. Although susceptible to market volatility and adverse market movements, stocks usually offer better returns than mutual funds. But before you invest in stocks, remember to perform an extensive fundamental analysis exercise to determine whether the stocks you’re planning to invest in are financially sound or not.
Additional Read: Bollinger Bands: An Introduction to the Indicator that Helps Predict Market Volatility
