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Mutual Funds vs Shares: What’s The Difference

A mutual fund is a financial tool which is made of a pool of money collected from investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. 

Mutual funds give investors access to professionally managed portfolios of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by aggregating performance of the underlying investments.

When you invest through Finserv MARKETS, you do not have to worry about financial advice and planning tips. Distributors were valued more for their advice than their efficiency, but Finserv MARKETS has filled the gap with the easy availability of financial tips and advice.

How do shares work?

Shares are units of ownership interest in a firm or corporation. Shares can also be termed as the financial assets that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Physical paper stock certificates have been replaced with electronic recording of stock shares, just as mutual fund shares are recorded electronically.

Investing in shares and mutual funds

Investment in mutual funds are a form of investment in stocks and bonds that is managed by an AMC or investment house.

Meanwhile, direct investment in stocks and shares is an active form of investment, where you are handling the purchase and sale of the products yourself.

The institutionalisation offered by mutual funds is good for a new investor, while direct investment in shares is good for those who know the market and can handle it themselves.

ding in shares requires you to have a demat account. Mutual funds do not need a demat account, though if you have one, you can use it to handle mutual funds.

Mutual funds vs shares

Here are some of the key differences between shares and mutual funds:

  • Mutual funds are a portfolio of stocks of companies that pre-determined and altered by a fund manager. Also, you as an investor have no control over the actual choice or trade of stocks. You also cannot choose to exit from one or two of the stocks from the portfolio.

  • Shares are a part of a business’s growth strategy, while mutual funds are investment options for individuals.

  • Trading in shares requires you to have a demat account. On the other hand, mutual funds do not need a demat account but if you have one, you can use it to handle mutual funds.

  • Mutual funds are managed by a fund manager in an AMC. This external management of portfolio ensures that there is direct involvement on the part of the investor except at the time of choosing the fund. Thus, mutual funds are ideal for a new investor who does not know much about the stock market. Direct investment in shares requires strong knowledge of the stock market and company performances. It is a hands-on activity involving quick market decisions and is better for experienced stock traders.

  • The passive nature of mutual funds makes it easier for anyone and everyone with money to take part in it. For direct investment, you need more time and dedication.

  • You can invest in mutual funds through a fixed monthly SIP, as it is managed by a professional. You cannot make such a fixed investment in shares directly as the prices fluctuate constantly and need personal attention and prompt trade decision.

  • Because mutual funds hold a diversified portfolio, negative returns are cushioned by the other stocks that do well. For example, if your portfolio contains 35 stocks, of which 3 are dropping, even the slightest growth in the other 32 will prevent your overall fund value from coming down. Direct investment in stocks does not offer you this protection and makes your stocks volatile. Unless you are dealing in a significant number of stocks at the same time, your money will be at high risk.

  • Mutual funds have a longer-term growth trajectory and will give good returns only after 5-7 years, while shares could give you quick returns if you buy and sell at the right time and choose high-growth stocks.

  • In mutual funds, you need to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc. In direct investment in shares you need to pay brokerage to the stock broker.

  • It is easier to diversify your portfolio using mutual funds – there are options such as hybrid funds. While dealing with shares, you may not be able to juggle with a large portfolio yourself.

  • Direct investment in shares can give you tax benefits only under Section 80CCG, while tax benefits on mutual funds can be claimed under Section 80CCG as well as 80C if it is an Equity-Linked Savings Scheme.

Risk factor associated with mutual funds and shares

While investing in individual shares, the risk is higher. Investors expect the share to do well in the near future, but if it doesn’t, they lose a handsome amount of money. Now, if as an investor, you invest the same amount of money in the mutual funds instead of individual share, it will be beneficial for you. If one share doesn’t yield better returns, another will. The diversification will help you reduce the risk as much as you can.

One can invest and earn a profit by investing in shares only if he/she invests a lot of time and dedication to it. The investment in mutual fund happens in the passive way hence the primary investor needs not to worry much about the investment decisions.

The risk factor is always present in all kinds of investments, whether it is mutual funds or in shares. But the negative returns in a mutual fund can be cushioned by the diversification. The investment in a mutual fund is done with different instruments such as stocks, bonds, securities etc. A mixed portfolio is created by the fund manager which ensures the maximum profit and minimum loss. The direct investment in stocks is riskier as it makes your stocks volatile. If you invest only in single stock, you may either earn a high profit or you may have to face a capital loss. The risk is always very high in shares.

Once you have invested in a mutual fund scheme, it is important to keep track and review its performance. Moreover, as you gradually diversify and invest in several schemes, keeping track could become taxing. When you invest in mutual funds through Finserv MARKETS, you can get detailed summaries and insights into your portfolio that can substantially simplify the review process. After remaining invested for some time, your financial goals may change depending on the performance of the existing schemes. Periodic reviews help in the reallocation of funds to derive maximum benefit from business and economic cycles. For instance, if your returns are lagging your expectations, you can reallocate some resources to a high-growth equity fund when the market is bullish to catch up in a short time.

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