Shares and Mutual Funds are the most popular investment instruments in the financial market. Investing in shares means that you are investing directly in equity markets, while Mutual Fund investments mean a professional fund manager is investing for you in either equity funds or debt funds. Both forms of investments have their distinct advantages and disadvantages.
Shares
Shares represent a part of a company’s value. When a company wants its shares to be traded, it offers an Initial Public Offering (IPO). The total value of its shares represents the total value of the company. This means that if you own shares of a company, then you are a part-owner of the company.
If the company is looking to raise funds for its business, it has two options:
- The company can borrow from a bank.
- The company offers an IPO, asking retail investors to invest in its shares, thus raising funds for its business.
Mutual Funds
Mutual funds are an amalgamation of stocks and bonds, managed by professional fund managers. Typically, fund managers are part of an Asset Management Company (AMC). It has two types:
- Equity Mutual Funds: Consists of shares of a company
- Debt Mutual Funds: Comprises government bonds and securities
A Mutual Fund is a diversified basket of shares from various companies which invests in money market instruments, including participatory notes and treasury bills.
Difference Between Shares and Mutual Funds:
| Shares | Mutual Funds | |
|---|---|---|
| Form of investment | Direct investment | Indirect investment |
| Diversification | At a time, you can purchase only a particular share. | You can have a diversified portfolio with a one-time investment. |
| Objective | Part of the company's growth strategy. | Investment option for an individual. |
| Control over investment | You are directly responsible for the choice of stocks. | Predetermined portfolio of stocks. You have no control over the investments |
| Fixed investment | No option for fixed investment as prices fluctuate regularly. | You can invest in a fixed monthly Systematic Investment Plan (SIP) |
| Fees and charges | Brokerage charges and other transaction fees. | You have to pay fund management charges, front-end load/back-end load charges, early redemption charges etc. |
| Growth trajectory | Can provide quick returns | Can provide good returns only in the long-term; typically after 5 years |
| Returns | Long-term returns can range from 14-16% | Average returns of up to 8% |
| Investor type | Best suited for people having expertise in stock markets. | Anyone can invest in Mutual funds |
| Risk assessment | Subject to high market volatility | Fewer market risks. |
It has become easy to trade in shares in the digital age. You just need to open a Demat Account along with a Trading Account, complete KYC formalities, and you are all set to begin your share trading journey. Whenever you purchase shares, it gets directly credited to your Demat Account, while Trading Account enables the link between your Demat Account and bank account.
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