Mutual funds v/s Shares. What’s the difference?
Mutual funds and equity stocks are two of the most sought after modern day investments in India. But in order to understand the difference between a mutual fund and a company share, we need first understand these two terms in great detail.
What are mutual funds?
Market regulator Securities and Exchange Board of India (SEBI), defines mutual funds as “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”
What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. Mutual funds are supposed to offer active risk management. Depending on the nature of the scheme and its risk profile a mutual fund may allocate its assets to equity, stocks, debt, corporate bonds, government securities, company fixed deposits, etc.
Mutual fund investors are allotted units in quantum with their investment amount and depending on the fund’s existing net asset value (NAV). The performance of a mutual fund depends on the performance of its underlying assets and the sectors and industries in which it invests.
What are shares?
A share or shares are units issued by a company through the means of an IPO (Initial Public Offering) to raise funds for company’s expansion. Investors can buy multiple shares or they can even sell them, trade with them at the stock market. However, they need to have a demat account and a trading account to buy/sell shares. Once the IPO is over, the company gets listed publicly after which everyone can buy or sell shares of that company. Depending on investors’ goals they can go for intraday trading or position trading. Intraday trading refers to buying and selling of stocks on a day to day basis to score profits. Position trading refers to buying shares and holding them for a long period and selling them when the stock price is higher than it was when the shares were purchased.
What is the difference between mutual funds and shares?
Here are some of the major factors that distinguish mutual funds from company shares:
| Criteria | Mutual funds | Shares |
| Managed by | Mutual funds, be it active or passive funds, are managed by a fund manager | Shares are not managed by any dedicated manager and those who buy them have to take the responsibility of managing them |
| Risk | Mutual funds offer active risk management as the fund manager buys/sells securities in accordance with the scheme’s investment objective | Share market investments are prone to concentrated risk as one invests in multiple shares of a company stock |
| Diversification | One mutual fund unit is a combination of fractions company stocks and other money market instruments | When you invest in a company stock one share equals to nothing but one share unit of the company |
| Value | The unit of a mutual fund is referred to as Net Asset Value (NAV) | The value of one share is referred to as price per share |
| Plans | Mutual funds can be brought either via a direct plan or a regular plan | There are no such plans available for share market investors |
| Liquidity | Mutual funds like liquid funds offer instant redemption 24/7 | It generally takes 2-3 working days for shares to convert into liquid cash |
| Rights | Mutual fund investors do have any voting rights in the company | Shareholders have voting rights |
Now that you know that difference between mutual funds and shares, where are you planning on investing? No matter where you invest, make sure to invest according to your risk appetite and have a diversified investment portfolio to balance risk.
Mutual fund investments are subject to market risks, read all scheme related documents carefully
