Mutual funds and shares are extremely popular investment options in the financial market. But both forms of investment come with different advantages and disadvantages. Explore this detailed mutual fund vs. share market comparison to learn which one would be a better investment option.
What is a Mutual Fund?
Mutual funds combine stocks and bonds together and are managed by professional fund managers. You will usually come across two primary types of mutual funds:
● Equity mutual funds: Includes company shares
● Debt mutual funds: Includes government bonds and securities
What is the Share Market?
Shares are representative of the value of a company. When a company wants to trade its shares, it has to offer an Initial Public Offering (IPO). If you own a share of a company, it means you have a part in the company’s ownership.
The price of a company’s shares in the market varies according to different factors. For instance, when a company performs well and indicates signs of growth, you will notice an upward trend in its share price.
Difference Between Mutual Funds and Stocks Investment
Look at this tabular representation of mutual fund vs. share market investments:
Mutual Funds Vs Stocks Investment
Let us now compare mutual fund vs. share market investments on the basis of the following factors:
1. Risk and Return
Individual stock purchases are risky, which results in high returns. However, stock market investments are also associated with negative returns.
Mutual fund schemes also have a high risk due to their asset class. But the risk is reduced to a great extent due to the diversification factor. Therefore, negative returns from one get balanced out by positive mutual fund returns from another.
You will have to rely on your knowledge, skills, and research while making share market investments. But your knowledge might not be enough for share market trading in different scenarios.
In the case of mutual fund investment, you won’t face any drawbacks in terms of knowledge and skills. Investing in mutual funds offers you access to fund managers with adequate experience to take care of your investments.
The difference between mutual fund and share market investments is also evident in terms of diversification. Diversification in the stock market involves investing in at least 15 to 20 different types of stocks. It means a huge investment for most individual investors.
But investors with little funds can also invest in mutual funds and get a diversified portfolio. Mutual fund investors can purchase fund units and invest in different stocks without having to spend a huge amount.
If you compare mutual fund vs share market investments, the cost of the former is lower. Mutual funds attract lower transaction costs, which means you will have to pay lower brokerages.
But for share market investments, you will have to pay the annual maintenance charges on your Demat account. Therefore, the costs for share market investment are naturally higher.
5. Investment Style
If you compare mutual fund vs. share market investments, your knowledge will be necessary for timing the market. You will be solely responsible for purchasing or selling the stocks. Therefore, you will have to be an active investor and optimize your returns.
But in the case of mutual funds, a fund manager will be responsible for tracking and management, and you will be a passive investor. Therefore, mutual funds are the best option when you don’t have the time or knowledge to actively monitor your investments.
6. Investing / Trading Time
If you compare mutual fund vs. share market investments, you will notice some differences in terms of trading time. The hours of stock trading range from 9:15 am to 3:30 pm. But you can purchase mutual funds at any time of the day.
7. Tax Benefits
A major mutual fund and share market difference is evident in terms of tax savings. If you invest in ELSS mutual funds, you will be able to save taxes of up to Rs 1.5 lakhs. However, share market investments do not offer any kind of tax benefits.
Why You Should Prefer Mutual Funds Over Individual Stocks
Are you wondering, “share market or mutual funds, which is better?” If so, you should know that mutual funds have some significant advantages over stocks. Check out why you should opt for mutual fund investment over stock investments.
1. Professional Management
When you are investing in mutual funds, you won’t have to analyze, track, or time them. An experienced fund manager will look after all this on your behalf. A major mutual fund and share market difference is that mutual fund investments are well-suited for passive investors.
If you want to diversify your stock market investment, you will have to invest in a minimum of 15 to 20 stocks. Therefore, the upfront investment amount will be quite high.
If you compare mutual fund vs share market investments, mutual funds will help with diversification even when you are investing only Rs 1000.
3. Lower Cost
While buying or selling mutual funds, you can negotiate with brokers to get better rates. It will lower your costs of mutual fund investment.
But when you are buying shares, you won’t be able to negotiate. Moreover, investing in the stock market requires you to maintain a demat account.
Hopefully, the difference between mutual fund and share market investments is not clear to you. Remember that mutual funds can help you reap the benefits of equity returns without the cons of direct equity investing. Moreover, you will get professional expertise while investing in mutual funds.
More About Mutual Funds
Frequently Asked Questions
Yes, you can invest as low as Rs 100 in your mutual fund portfolio. The low investment amount is what makes most people start their investment journey with mutual funds.
Mutual funds get largely affected by share market volatility. The price fluctuations in the share market will affect the NAV of mutual funds.
If you are comparing a mutual fund vs share market, you will realize that stocks are riskier. Mutual funds invest in shares, but they offer portfolio diversification. Therefore, the price fluctuations in the stock market won’t affect the mutual fund like an individual stock. The volatility gets averaged out due to mutual fund diversification.
If you are investing in open-ended mutual funds, you will be able to make convenient withdrawals anytime you want. But ELSS funds come with a lock-in period of three years. You won’t be able to withdraw from them before the lock-in period is over.
The duration of your mutual fund investment will depend on the type of fund you have chosen. The recommended investment period for equity mutual funds is a minimum of 5 years. In the case of debt mutual funds,
If you are interested in share market investing, you can choose from the following types:
● Non-participating preference shares
● Participating preference shares
● Convertible preference shares
● Non-convertible preference shares
● Redeemable preference shares
● Irredeemable preference shares
● Cumulative preference shares
● Non-cumulative preference shares
Several people wonder, “share market or mutual funds, which is better?” The truth is that the share market risk is higher. Mutual funds have a lower risk due to the factor of diversification.
The lowest investment amount in mutual funds is Rs 100. In the share market, you can invest Rs 100 or even lower.