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In the investment world, shares and mutual funds are two popular choices to help individuals grow their wealth. For Indian investors, understanding the distinctions between these investment options is crucial.
Shares, also known as stocks, represent ownership in a specific company, while mutual funds pool money from multiple investors to invest in a diversified portfolio.
This blog aims to shed light on the key diff between mutual funds and shares, enabling readers to make informed decisions about their investment journey.
What are Shares?
Shares, also known as stocks, represent ownership in a company. When investors purchase company shares, they become shareholders, entitling them to a portion of their profits and assets
These shares are tradable in the stock market, allowing investors to buy and sell them based on market demand and company performance. Owning shares grants investors voting rights in company decisions, such as electing the board of directors or approving significant corporate changes.
In a hypothetical scenario where an investor buys 100 shares of XYZ Ltd., a technology company listed on the stock exchange. If the company performs well and distributes dividends, the investor will receive a portion of the profits based on the number of shares owned.
Additionally, if the company's value increases over time, the investor can sell their shares at a higher price, making a capital gain.
Examples of shares include those of prominent Indian companies like Tata Motors, HDFC Bank, Reliance Industries, and many others.
What are Mutual Funds?
Mutual funds are investment schemes that pool money from multiple investors and invest in a diversified portfolio of assets. They have fund managers who manage the investments based on the fund's investment goals.
Mutual funds offer an excellent avenue for individuals to invest in a diversified basket of securities without the need for direct stock picking.
Let's consider an example of an equity mutual fund. An investor contributes funds to the mutual fund; in return, they receive units in proportion to their investment. The mutual fund accumulates money from various investors and invests it in a diversified portfolio of stocks across different sectors.
As the fund's value increases or decreases, the value of the investor's units (Net Asset Value - NAV) also changes accordingly.
One of the significant advantages of mutual funds is that they are diversified. By investing in multiple securities, mutual funds spread the risk and reduce the impact of poor performance by a single company or industry.
Moreover, mutual funds offer the flexibility of systematic investment plans (SIPs) where investors can invest small amounts regularly, making it an accessible option for retail investors to participate in the equity markets.
We have attached a table in this blog to show the primary differences between stocks and mutual funds. Let’s get to it.
Difference Between Mutual Fund and Shares (Stocks)
Below is a detailed list of differences between shares and mutual funds:
Aspect |
Shares |
Mutual Funds |
Nature of Investment |
Direct ownership in a single company |
Indirect ownership in a diversified portfolio |
Diversification |
Not diversified – depends on the company's performance |
Diversified - invested in multiple securities across various sectors and industries |
Ownership |
You own a small piece of the company |
You own a share of the mutual fund's portfolio |
Management |
Self-managed or hiring a portfolio manager |
Professionally managed by experienced fund managers |
Liquidity |
Lower liquidity – may take time to sell shares in low-demand |
Higher liquidity - can be easily bought or sold |
Investment Amount |
Can invest in a single share or a few shares |
Requires smaller investment due to pooled investments |
Monitoring and Research |
Requires continuous monitoring and research of individual companies |
Fund manager monitors investments on behalf of investors |
Risk |
Higher risk due to concentrated holdings |
Lower risk due to portfolio diversification |
Which One is Better - Stocks Vs Mutual Funds?
The decision between investing in stocks or mutual funds depends on an individual's financial goals, risk appetite, and investment horizon.
Stocks offer the potential for higher returns, but they also come with higher risks due to their concentration in one company.
On the other hand, mutual funds provide diversification, reducing the overall risk but may offer moderate returns. For investors with a generous risk appetite seeking high returns, individual stocks can be an option.
Mutual funds can be better for those who prefer a diversified portfolio and professional management.
Investing in Life Insurance: The First Step Towards Investment?
While shares and mutual funds are essential for wealth creation, securing one's financial future with a life insurance policy is paramount. Life insurance policies offer financial protection to your loved ones in case of an unfortunate event.
Life insurance also offers tax* benefits under Section 80C and Section 10(10D) of the Income Tax* Act, making it a prudent investment choice.
But choosing a reliable life insurance company is crucial for policy buying. They offer hassle-free services during claim settlements. Tata AIA life insurance company is one such reliable company that has a decade-old market reputation. We have a team of finance experts who can help you choose the best life insurance policy for yourself and your family.
Conclusion
Understanding the differences between shares and mutual funds is vital for investors to make well-informed decisions in their financial journey. Each option has its merits and suits different investment objectives.
While stocks offer the potential for higher returns, mutual funds provide diversification and professional management. Investors can consider both for a balanced investment strategy based on their risk tolerance and financial goals.
Additionally, complementing investment decisions with a life insurance policy ensures a secure future for oneself and loved ones. Consulting a financial advisor can help investors tailor their portfolios to meet their unique needs and aspirations.
