Difference Between Shares and Mutual Funds

Difference Between Shares and Mutual Funds

Shares are small units of a company’s capital that represent their value and are usually traded on the stock market. Shares are also called equities or stocks.
When a company is looking to get additional funds for their business, they trade their shares in stock markets by offering an Initial Public Offering (IPO).
After IPO, the company gets listed on the stock exchange, and it is avaialble to all the investors.
When the company performs well in its business and grows, the value of its shares also increases. So if an investor holds shares for the long term, they will generate a good profit by selling them.

Mutual funds are a collection of several stocks and bonds taken care of by fund managers in Asset Management Company (AMC).
They collect money from several investors and invest in selective company’s stocks or bonds. The returns accumulated from these investors are given to the investors. An investor can either opt for SIP or in lump sum mode to invest in mutual funds.
Mutual funds like a basket that contains a large number of shares from several companies.
There are two different types of mutual funds?

Mutual funds also invest in several money market instruments that include treasury bills and participatory notes.
These funds are also used as a purpose to invest in real estate, gold and other commodities. In simple words, mutual funds invest your money in various categories of an asset class to generate returns.

Here is the direct comparison between shares and mutual funds that every investor should know:

  • Cost of Investing
  • Investing in mutual funds requires some cost to pay because an investor has to pay different charges like load fee, expense ratio and more.
    However, the expense ratio of top companies can go up to 2.5-3%. On the other hand, an investor looking to invest in the stock market has to pay the fees for opening their brokerage account.
    This includes opening account charges along with annual maintenance charges. Furthermore, multiple costs are involved, such as stamp duty, brokerage fees, and more.
    So if an investor looking to compare the difference between the shares and mutual funds will find that cost of investing in stocks is low compared to mutual funds.
    Mutual funds consist of several expenses like salary, management fees, operational charges and more.
    However, in shares, the only pain that an investor will find is the brokerage fee.

  • Return Potential
  • The major benefit of investing in the stock market is it delivers high return potentials. Several well-known and successful investors have accumulated their wealth by directly investing in the stock market.
    One major disadvantage of investing in stocks is the risk factor due to which several people lost their crucial money. Although investing in stocks has high return potential, but it also comes with a higher risk.
    On the other hand, the return potential is good because most good mutual funds deliver decent and consistent returns to all their investors.
    Although returns are not as high compared to stocks, it is a respectable return through which an average person can secure their financial future and build massive wealth.

  • Ease of Investment
  • An investor has to go through all the hassles, from opening an account to invest. It’s because they have to open a brokerage account with the help of a verified stockbroker. They also need to start their trading and Demat account, which will take up to 1 week.
    While in mutual funds, an investor can start their investing journey quickly within 10 minutes. In addition, they don’t have to open a brokerage account to start investing.
    Instead, they can register in several reputable mutual funds platforms to register easily and start investing in mutual funds.

  • Monitoring
  • Investors have to keep a watch on the stock market because it’s more like a personal thing. But, unfortunately, here no one will help them, so they have to do it on their own. That’s why monitoring stocks by yourself seems a challenging task.
    In mutual funds, they don’t have to monitor because there are experienced mutual fund managers who will take care of their investment and decide all by themselves.
    Several investors look to invest in mutual funds because the time invested in monitoring is saved. However, an investor should also monitor their funds frequently to check their performance.

  • Tax Saving
  • Investors who have invested in Equity linked quality scheme under mutual funds will benefit from a tax deduction of up to 1.5 lakhs under section 80c of the income tax act every year.
    Another advantage of investing in mutual funds is that they don’t have to pay any tax if their fund sells stocks from their portfolio as long as an investor is holding the fund.
    In shares, an investor has to sell directly to the share market. It means they have to pay a tax no matter whether they’re buying or selling.
    There are no tax benefits involved while investing in stocks. However, an investor has to pay a 15% tax on short-term gains and 10% on long-term gains if the investor earns a profit above 1 lakh.

  • What do you mean by shares?
  • Shares are small units of a company’s capital that represent their value and are usually traded on the stock market. Shares are also called equities or stocks.

  • What do you mean by mutual funds?
  • Mutual funds are a collection of several stocks and bonds taken care of by fund managers. They collect money from several investors and invest in selective company’s stocks or bonds. The returns accumulated from these investors are given to the investors.

  • What is the major difference between shares and mutual funds?
  • The major difference between shares and mutual funds is that in shares an investor has to open a demat account, pay brokerage and other broking taxes and monitor the portfolio regularly. While in mutual funds an investor has to only need to buy Units of any particular schemes at NAV price and no additional broking taxes or charges. The NAV price is adjusted as per the expense ratio and the funds are managed by experienced fund managers that deliver returns.