Though both shares and mutual funds represent investment opportunities, they require a different approach for the same. Besides the steps of investing in them, there are other differences between stocks and mutual funds that potential investors must be informed about. In doing so, they will be able to gain a better insight into both options to make a more sound decision.
What are Shares?
In simple words, shares can be defined as a unit of proportional ownership in a company’s capital. It further entitles shareholders to the company’s profit and loss equally.
Notably, there are several factors that may influence the price of shares in the market. For instance, when a company performs well and shows signs of growth, its price shows an upward trend.
Typically, a company issues shares to the public to raise capital and to enhance the company’s value in the market. It also provides investors with the opportunity to hold a stake in a company’s equity and earn a portion of their profits.
Usually, individuals benefit from investing in shares in two forms, namely, capital gains and dividends. They can invest in stocks for both long-term and short-term.
Investors need to invest directly into the stock of a company through their Demat account and avail an opportunity to diversify their portfolio. This is a major difference between shares and mutual funds.
Types of Shares
There are two types of share, namely –
1. Equity shares
These shares are categorized as ordinary shares, and they come with an array of benefits for shareholders, including voting rights, substantial dividends, etc. Equity shares are issued at face value and are widely traded in the stock exchange.
Some of the prominent categories of equity shares are as follows –
- Authorized share capital
- Paid-up share capital
- Issued share capital
- Right share
- Subscribed share capital
- Bonus share
- Sweaty equity share
2. Preference shares
The preference shareholders are given priority over equity shareholders in the event of liquidation and distribution of dividends. However, preference shareholders do not enjoy any voting rights as such.
Typically, preference shares are categorized based on their structure, dividend pay-out, maturity period, etc. The following are the common types of preference shares –
- Cumulative preference shares
- Convertible preference shares
- Participating preference shares
- Redeemable preference shares
- Non-participating preference shares
- Non-convertible preference shares
- Non-cumulative preference shares
- Non-redeemable preference shares
Individuals who invest in shares are directly responsible for managing it and are required to bear the entire trading cost. Hence, one needs to have a fair understanding of the market to make the most of this investment opportunity.
After shares, it is crucial for investors to become familiar with the fundamentals of mutual funds to understand the difference between shares and mutual funds more effectively.
What are Mutual Funds?
In the general sense, mutual funds are a collective investment option. It pools money from several investors and puts it in different bonds, securities, stocks, gold, FDs, etc. of profit-generating companies.
By investing in mutual funds, investors partake in the profits and losses accrued by their fund’s portfolio. Notably, individuals can put their money in the shares of companies that are listed on stock exchanges. Also, most mutual funds help gain higher returns and facilitate capital appreciation if investors stay invested for a long time.
A major point of difference between stock and mutual funds is that, unlike stocks, mutual funds are managed by fund managers. Besides professional management, this investment instrument comes with the following benefits –
- Tax savings
Also, the fact that mutual funds are regulated by SEBI makes its proceedings transparent and considered reliable.
Types of Mutual Funds
In a broader sense, mutual funds usually invest money into a combination of debt-equities or either of the two. Generally, mutual funds can be categorized on the basis of the maturity period and principal investment.
Based on the maturity period
The common mutual fund schemes belonging to this category are of three types –
- Open-ended scheme
- Close-ended scheme
- Interval scheme
Based on the initial investment
The following are some of the common schemes under this category –
- Debt schemes
- Equity schemes
- Hybrid schemes
Notably, each of these schemes harbors several types of funds that come with different risk and reward factors.
With the types being discussed, let’s proceed to the primary difference between a mutual fund and share market instruments.
Read more: Types of Mutual Funds
Difference between Stocks and Mutual Funds
This table below highlights the basic difference between stock market and mutual fund investments.
|Definition||They represent the ownership of companies.||Investors are similar to shareholders who own funds or stocks and earn profits on them.|
|Denomination||Different stocks can have the same or equal value.||Essentially it is a pool of money collected from investors.|
|Numeric value||Stocks have a definite numerical value.||Mutual funds have net asset values.|
|Original Issuance||Original issuance is always a possibility.||There is no such possibility.|
|Risk level||They come with a higher risk level.||The risk factor is comparatively low.|
|Suitability||Seasoned investors with sound market knowledge have chances of performing better in stocks.||Professionals manage these funds, and both new and seasoned investors can benefit through it.|
|Diversification||Diversification is only possible if the stocks allow it.||Mutual funds offer more opportunities for diversification.|
|Return potential||They offer relatively higher returns.||Depending on the scheme, it provides high to moderate returns.|
|Market knowledge||Investors must be well-versed with the market forces to manage stocks effectively.||Market knowledge is rewarding in case of mutual funds as well.|
|Trading cost||The trading cost is significantly high.||The expense for funds is retrieved through investors during the investment.|
|Convenience||Individuals can invest in stocks through Demat and Trading Account. The process to do so is cumbersome and less convenient.||Investing in mutual funds is relatively more convenient and can be initiated within minutes.|
|Tax benefits||Investors must pay a tax while selling their stocks.||Several mutual fund schemes offer tax-saving benefits to investors.|
|Restrictions||It comes with asset-class restrictions.||Investors can put their money in a diversified portfolio.|
|Investment horizon||Investment in stocks can either be for the long-term or short-term.||Most mutual funds reflect better results when kept invested for the long-run.|
|Systematic plan||Stocks do not extend the feature of systematic investment plans.||Mutual funds come with the feature of the systematic investment plan.|
|Control over investment||Stockholders tend to have relatively more control over their investment.||Mutual funds investors do not have much control over their investments.|
Based on the difference between stocks and mutual funds, it is evident that both shares and mutual fund investments are rewarding. Regardless, investors should put their money in any of the two depending on their capabilities.
For instance, they should weigh factors like their income, risk-taking capability, market knowledge, preferred investment horizon, and financial goals into account before investing. Based on these, they can pick a more profitable option from a mutual fund vs share market instrument.