Both mutual funds and shares share similar sources and are considered the most attractive investment tools, but the way we invest in them is different. As per the recent 2022 data, almost 30% of the Indian population invests in mutual funds, and 10% of the population shows interest in shares/stock investments.
There are other differences between shares and mutual funds, and knowing them will definitely help you as an investor choose the right one to fuel your financial goals.
In this article, we will discuss mutual funds and shares and compare them to decide which one is better.
What are shares?
Shares can be defined as the units of ownership you have in a company’s entire capital. This affects the shareholder when the company makes profit or losses.
A company issues shares to raise capital and enhance the company’s value. Shares are purchased by shareholders in order to have a stake in the company's equity.
There are two ways in which you can make money by investing in any company’s shares: capital gains (Profit earned by selling assets such as shares, bonds and real estate) and dividends (A dividend is a part of the profit or earnings a company pays to its shareholders). Depending on your needs, you can decide to invest in a particular share for the long or short term.
Share prices are influenced by several factors; one is that when a company performs well, its share price shows an upward trend. Inflation and interest rate changes also impact share prices.
As an investor, you can directly invest in shares through your Demat account.
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What are mutual funds?
Mutual funds are collective investment schemes where money from different investors is gathered together in a pool and invested in different investment options such as bonds, gold, securities, shares, and equities.
In mutual funds, too, the investor takes part in the company’s losses and profits. The major difference between shares and mutual funds is that, unlike shares, mutual funds are managed by fund managers and have some added benefits. Mutual fund investments are affordable, diversified, offer tax benefits, have professional management, and offer easy liquidity.
What is the distinction between shares and mutual funds?
Some of the most common differences between shares and mutual funds are:
- When it comes to shares, the investor has to manage the investment himself. Mutual fund investments are managed by a professional fund manager.
- In shares, the investor has to invest in individual shares. Whereas in mutual fund investments, the entire amount is invested in a diversified set of assets based on goals.
- Shares are more open to risk. The risk factor is there in the case of mutual funds, but it is much lower since the amount is invested in various assets.
- Mutual fund investments are more diversified as you can invest in various assets.
- Mutual fund investments are also cost-effective, as you can decide the amount you want to start with. But that is not always the case with shares.
You may invest in shares and earn more, but at the same time, you need to know the market trends. Mutual funds are meant for everyone. You can start small with little or no knowledge. Mutual funds also help you achieve long-term financial goals if you hold them for longer.
Both mutual funds and stocks have their positives and negatives but ultimately, the needs of the investor, the knowledge they have about the market, and the kind of risk they can handle determine which mode of investment they should choose.
Every investor has different objectives, and it is best practice to choose the right investment depending on the purpose, investment timeline, and risk.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.