Main 11 Difference Between Mutual Fund and Shares

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There are a few different ways to invest your money.

One of the most popular ways is through investing in stocks and shares. Another way is through mutual funds which allow you to get diversified exposure without having to buy individual stocks or bonds yourself.

But what’s the difference? In this blog post, we’ll go over some of the similarities and difference between mutual fund and shares, so you can make a more informed decision about which one suits your needs best!

What are mutual funds?

what are mutual fund

Mutual funds are essentially investment companies that pool money from many investors and invest in securities such as stocks, bonds or other assets.

Mutual fund companies typically charge a set fee, called a sales load or no-load, for each share purchased or sold in the fund.

Mutual funds are a good way to invest money for long term investments. The fund manager buys the stock or bond, without you having to worry about researching them.

They will share the returns with you if you invest in them. This helps investors have an average return.

Mutual funds are available in various types like Cash Mutual Funds, Debt Fund, Liquid Fund, Tax Saving Mutual Funds and many more. 

Mutual funds can be broadly categorized as equity or debt. Generally, debt mutual funds are riskier than equity mutual funds.

Mutual fund investing can be done through a number of financial institutions, including banks and brokerage firms.

What are shares:

what are shares

A share is a unit of ownership in an incorporated company. Owning shares allows people to be part-owners and receive a share of any profits.

Shares can also be defined as securities that are owned by the shareholders of a company.

A shareholder actually owns part of the firm and is credited with a share on the company’s register known as equity shares.

For instance, if a company has issued 100 equity shares, then each one represents ownership in the business.

When you buy a share you expect the value of it to increase over time. That is the reason why people invest in stocks and mutual funds.

The value of your investment depends on how successful the company is for which stock you are investing in.

If the company sells more products or services, there is more demand for its product and that means a higher price for its stock.

If the company starts losing money, there will be less demand for its products and stock prices will fall.

The price of shares moves up and down according to supply and demand, like the prices of other securities such as bonds.

11 Difference Between Mutual Fund and Shares :

Mutual funds and shares have different characteristics.

Let us see some major differences between mutual funds and shares with reference to their characteristics and comparison.

difference between mutual fund and share
  1. A share is a fraction of ownership in the company, whereas, a mutual fund is a collection of money pooled together from many investors to invest in securities that do not give any ownership in the company.
  2. Shares have a face value, whereas mutual funds don’t.
  3. Shares are traded on stock exchanges, whereas Mutual funds are available only through financial intermediaries like brokers (Dealing/ Trading Account) or Mutual Fund Distributors (saving account).
  4. Shares can be used as collateral for borrowing, whereas Mutual funds are not considered as securities that can be used as collateral for loans.
  5. A big difference between mutual funds and shares is the way dividends are handled. Since mutual funds follow a portfolio management strategy, they do not pay any dividend and hence cannot be considered as equity investments. On the other hand, in the case of shares, investors stand to gain from dividends that are paid by companies based on the number of shares they hold.
  6. Mutual funds have a minimum investment amount as low as Rs. 500/- whereas shares do not have any such minimum limits on investments amounts.
  7. Shares can be bought and sold on a day to day basis through exchanges, whereas mutual funds cannot be traded directly between investors but are traded through brokers.
  8. A unique feature that comes with almost all mutual fund schemes is that they have an exit load if one chooses to sell mutual fund units within 1 year from the date of investment. Currently, the exit load is 1% however in the case of some mutual fund schemes, it could be as high as 5%. On the other hand, shares are easily tradable on stock exchanges.
  9. Another difference between mutual funds and shares is related to taxation. In the case of mutual funds, gains from the sale of units within a year will be taxed as per your income tax slab rate while in the case of equity shares, gains from sale would be considered as short-term or long-term gains or as per your income tax slab rate.
  10. Another difference lies in the mechanism of investment. Mutual funds quote prices based on Net Asset Value (NAV) while shares quote prices based on Market Capitalization.
  11. There is basically no difference between mutual funds and shares when it comes to the role of the regulator. In both cases, SEBI is the regulator.

Advantages and Disadvantages of Investing in Mutual Funds:

Even though everyone loves the idea of getting rich quick, investing in mutual funds isn’t a get rich overnight scheme.

Investing in mutual funds may seem easy, but you need to understand what are the pros and cons of investing in a specific fund that fits your needs.

Advantages of Investing in Mutual Funds:

Advantages of Investing in Mutual Funds

1) Easy diversification: Mutual funds allow you to invest in multiple stocks and bonds and other assets.

If your fund invests in different asset classes, then it’s easier for the portfolio manager to find undervalued equities which will make your returns greater than if you had invested only in stocks or bonds.

2) Professional management: Mutual fund companies hire professional money managers to invest the fund’s assets and ensure steady growth.

3) Upside potential: Mutual funds can generate higher returns than other investment methods in a risk-controlled manner.

4)  Lower fees: Fund fees are generally lower than what you would pay to buy stocks directly from brokers or banks. Many mutual funds offer no-load or low load fees.

5) Easy to buy and sell: Mutual funds are easy to buy and sell, which is important for investors with short investment horizons.

You can purchase a mutual fund through an automatic plan where the mutual fund company will invest on your behalf on a monthly basis or as soon as you have enough money in your account.

There are other options like electronic portfolio tracking systems where you can check the net worth of your mutual fund online or through their respective website.

6) Best long-term Investment Options: Mutual funds are considered to be one of the best long term investment options, as it offers diversification that you cannot achieve with other types of investments.

You can select the best mutual funds on the basis of your investment objective and can invest in a combination of various funds that suits you best.

It is one way to create a diverse portfolio that will help to minimize risks and maximize returns over time.

7) Can easily invest a small amount: You can start investing in Mutual Funds as low as Rs. 500

Disadvantages of Investing in Mutual Funds:

Disadvantages of Investing in Mutual Funds

1) Lack of control: While mutual funds allow investing in multiple securities, you don’t have any control over how your money is being managed.

If something goes wrong with one stock in your portfolio, then it may have a direct impact on your overall returns.

2)  Complex: Investing in mutual funds can be very complex for first-time investors, which is due to the fact that more than 9,000 mutual funds are available from around the world.

You need to make sure you understand how each fund operates and its investment strategy before deciding to invest in it.

3) Not for short-term investors: While mutual funds are ideal for long term investors, they are not suitable if you need quick returns from your investment.

As an investor, you have no control of when the fund will buy new stocks or sell existing ones and make the required changes to its portfolio.

Mutual funds may not be the best choice for a young investor who doesn’t have enough time to wait and see how things play out.

4) No guarantees: Funds, like other types of investments, do incur risks. Keep in mind that mutual funds can drop in value and investors may lose money.

5) Complex tax code: Investments made through mutual funds are subject to the capital gains tax, which is different from other investments that involve direct purchases of individual bonds or stocks.

6) Not all the schemes of a mutual fund perform the same (even for a single fund house)

The Advantages and Disadvantages of Investing in the Stock Market are as follows:

Investing in shares is a great way to make money. However, it does come with some risks attached. It’s important to weigh up the advantages and disadvantages of investing in shares before you start purchasing shares in companies.

Advantages:

1. Opportunity to Generate Income- Investment in the stock market can help you generate steady income if done right. You can invest in dividend-paying stocks that provide a high rate of return on your investment over time.

Investing in dividend payer stocks will give you an additional source of income on top of your wages.

2. Liquidity – Liquidity refers to how easily and quickly an asset can be sold or converted into cash in order to meet financial needs.

You can enjoy liquidity because you are able to sell your shares at any time after purchasing them.

3. Ability to Customize Investing Strategy- When you invest in the stock market, you have the flexibility to design your own investment strategy that will suit your risk tolerance and the amount of money you plan to invest.

With just a little bit of knowledge about investing strategies such as value investing or growth investing, you can customize your investment strategy to your needs.

4. Ability to Diversify Your Portfolio- Through Investing in Stock Market you will have the opportunity to diversify your portfolio and reduce risk at the same time.

This is very important because having a well-diversified portfolio can help protect against volatility in one sector or industry by investing in other sectors.

5. Ability to Choose the Right Investment- When you invest in the stock market, you will have the opportunity to choose which company or industry that interest you.

Then based on what strategy is suitable for your needs and risk profile, you can choose how much of your money to invest in each investment.

Disadvantages:

1. Volatility – The stock market is also known to have volatile fluctuations in prices, which means that at any given time the price of a share or an index may go down as well as up.

2. Complexity- Investing in the stock market can be very complex for new investors because there is a lot of information and knowledge required to make good investment decisions.

You will need to know how risk diversification works, which stocks are best suited for your needs, and various investment strategies to apply on top of your existing knowledge to succeed in this market.

3. Takes Time- The stock market can take some time to mature and generate returns on investment. This is why it is important for investors to choose stocks that they believe will continue doing well over the long term before investing in them.

4. Risk – Investing in stock markets has been known to be risky. You have to know the proper strategies and read up on investing tips to minimize those risks.

5. No Guarantees- Investing in stock markets also comes with no guarantees that you will make money or even earn a profit at all, and bear another thing in mind, you can lose your investment in the process.

Conclusion:

Buying shares and mutual funds is a complex investment decision. When considering whether to invest in these instruments, the investor should understand their nature and features.

Generally speaking, shares have been viewed as relatively risky investments. If you are a conservative investor who wants to grow their money over the long term with low risk, mutual funds may be your best bet.

On the other hand, if you want to spend more time on your investments, or if you want to take extra risks for the chance of getting a higher return, it might be good for you to invest in stocks.

We hope that this blog post has helped illuminate some of the differences between these two investments so that you can make an informed decision about what type of investment makes sense for you today and into the future!

Disclaimer: Readers who are interested in investing their money should consult a financial advisor before making investment decisions.
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