What is the Difference Between Mutual Funds and Shares?
With the growing popularity of equity funds that invest money in shares, many new investors confuse mutual funds with shares. With little investment knowledge and experience, a lot of new investors get confused between mutual funds and shares. Some even assume that mutual funds and shares are the same. However, mutual funds and equities are completely different financial instruments. Let us have a detailed look at mutual funds vs shares to understand better.
What are Shares?
When a company needs funding, it can take a loan or raise capital by selling its shares. For the latter, they issue an IPO(Initial Public Offering) and raise funds through the public. Furthermore, you can buy shares of listed companies from the various stock exchanges. When you purchase shares of a company, you receive a stake in the company based on the proportion of shares you own. Investors purchase the shares at a particular price and sell at a different rate. The difference between the buying and selling price is the profit/loss.
What are Mutual Funds?
Mutual funds are an investment option that invests your money in different financial instruments. For instance, equity funds invest your money in shares of various companies. When you invest in equity funds, you don’t directly purchase shares of any company but get mutual fund units that are distributed by the fund house. In this process, you invest in a mutual fund at a particular NAV (Net Asset Value) and sell the same at a different NAV level. The difference in the buying and selling NAV levels is the profit/loss.
However, apart from an equity fund, there are different types of mutual funds you can invest in, such as debt, liquid, money market etc. Some funds, such as hybrid funds, combine multiple asset classes to invest in equity as well as debt instruments.
Why choose Mutual Funds over shares?
Investors find it very difficult to select companies and their stocks that could help them generate considerable returns. Stock selection requires significant knowledge and experience, which beginner investors lack. If the identified stocks turn out to be the wrong choice, it can lead to huge losses.
Some other reasons include:
- Mutual funds ensure diversification as funds are invested in several companies.
- One can start investing with as little as Rs. 500 per month through SIP.
- Eliminates the need to monitor the markets consistently.
- Complete transparency and secure online access.
What should you select?
While direct investment in the stock market can offer good returns, it requires a lot of investing experience and knowledge to pick the right stocks. You should know the right time to enter and exit a particular stock to regularly generate profits from your investment. If you are new to the investment world, it is always better to invest through mutual funds. Even most seasoned investors allocate a portion of their capital to mutual funds. The diversification, flexibility, accessibility, and various options to choose from makes mutual funds a smart choice for every investor.