It is time to talk about the two stalwarts of the investment world - shares and mutual funds. If you are an investor or planning to start investing, you must have come across these two names and wondered which side of the alley you should be walking towards. The choice can be confusing, with potentially several people advising you to lean one way or the other. However, logical comparison and understanding of the two investment instruments can help you find the winner in the mutual fund vs share market battle.
What are shares?
Shares represent ownership in a company. When you buy stocks of a publicly listed company, you become its part-owner and can potentially earn a profit if the company performs well. This means when the company does well, its stock prices may increase, and you may benefit from this appreciation when you sell your stocks. Shares also come with the risk of losing money if the company performs poorly.
You can buy and sell shares on the stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), through a trading and Demat account.
Let’s now move to mutual funds.
What are mutual funds?
Mutual funds are a type of investment that takes money from multiple investors and invest it in a diverse portfolio of securities, including stocks, bonds, and other assets. Mutual funds have a fund manager who manages the pooled cash, decides where to invest it, changes asset allocation and diversification based on the type of fund, changing market conditions, and more. When the mutual fund earns returns, it is passed on to all investors proportionately.
The risk involved in mutual funds varies as per their type. Generally, mutual funds can be categorised into three broad categories, including:
However, there are several other types of mutual funds, like solution-oriented funds, and others. You can check the Securities and Exchange Board of India’s (SEBI) Categorisation and Rationalisation of Mutual Fund Schemes to stay up to date with the types.
It is essential to know the differences between mutual funds and the share market to understand each of these investment instruments.
Mutual fund vs share market: Differences
Points of difference | Shares | Mutual funds |
Costs involved | You may have to pay brokerage and transaction charges when investing in shares. | Mutual funds come with charges, such as the expense ratio, exit load, etc. |
Type of investment | Shares are a direct form of investing. They are also referred to as direct equity as you directly invest in the company. | In the case of mutual funds, the fund manager buys and sells securities on your behalf. You invest in securities through the mutual fund indirectly. |
Risk | Shares are considered to be high-risk investments as they are exposed to market volatility. | Different mutual funds carry different risk levels. Equity funds are considered to be high-risk investments, whereas debt funds carry relatively low risk. Hybrid funds carry medium risk. |
Diversification | Stocks do not provide diversification unless you create a portfolio of different stocks from multiple companies, industries, market capitalisations, etc. | Mutual funds provide diversification inherently. Each mutual fund may invest in a variety of stocks, bonds, and other securities. As long as you invest in a fund with a well-diversified portfolio, you can spread your risk and potentially lower it. |
Tax benefits | Shares do not provide any tax benefits. Moreover, the earnings are taxed as capital gains. Short-term capital gains from stocks held for less than a year are taxed at 15%, and long-term capital gains on stocks held for more than a year are taxed at 10% on profits exceeding Rs 1 lakh/year. | Equity-Linked Savings Scheme (ELSS) is a type of mutual fund that offers tax benefits under Section 80C of the Income Tax Act 1961. You can reduce your taxable income by up to Rs 1.5 lakh annually by investing in ELSS. |
Conclusion
Shares and mutual funds have their own appeals and can suit different goals. It is essential to consider your investment preferences, financial goals, and risk tolerance before choosing which one to invest in.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
