Mutual Funds vs. Share Market: Key Differences Explained

What Is a Mutual Fund?

Mutual funds are investment vehicles where capital from several individuals are pooled together and invested in a diversified portfolio of investments. The portfolio is managed by professional fund managers in accordance with the investment objectives of the fund.

Common types of mutual funds include:

• Equity Mutual Funds: Investment in equity shares of the listed companies with the primary motive of generating capital gains.
• Debt Mutual Funds: Investment in the fixed income securities including government securities, treasury bills, and corporate bonds.
• Hybrid Mutual Funds: Investment in a mix of equity and debt securities in order to adopt a balanced investment approach.
• Index Funds: Investing in the securities in line with the chosen market index like Nifty 50 or Sensex.
• Exchange Traded Funds (ETFs): Units of the mutual funds that get traded in the recognised stock exchanges, generally following an index, commodity, or any other asset.

What Is the Share Market?

The share market is a place where investors trade in shares of companies which have been listed on recognised stock markets. In this context, the buying of shares by investors will make them partial owners of the company, and they can benefit from changes in the price of the share along with any dividend payments, if any.

It should be noted that companies usually offer shares of the company through IPOs before listing on recognized stock markets. Once the company is listed, the share prices change throughout the trading period depending upon certain factors like performance of the company, economic environment, etc.

It is different from mutual funds where the investor picks up his own investments in the share market.

Mutual Funds vs. Stocks: Key Differences

The following table highlights the difference between mutual fund and share market:

Mutual Funds vs. Stocks: Factor-by-Factor Comparison

The factor-by-factor comparison of stocks vs mutual funds are as follows:

Risk and Reward

A mutual fund lowers the level of concentration risk by investing in several securities at once. Shares provide more rewards, but also have more risks.

Management of Investments

The management of mutual funds is handled by professional fund managers who make investment decisions for the investors. Share investors are expected to choose and manage their investment on their own.

Diversification

Mutual funds invest in different sectors, industries and even companies, therefore they provide diversification. Shares can be concentrated if investors do not invest in a diversified way.

Cost of Investment

A mutual fund collects the expense ratio that covers management of its portfolio. Investors who are buying and selling stocks will pay the cost of transactions.

Approach to Investment

Mutual funds are the choice of investors who are interested in professionally managed investments. Shares might be the better choice for those who want to conduct research independently.

Trading and Liquidity

Stocks are traded throughout market hours at continuously changing prices. Open-ended mutual funds are generally purchased or redeemed at the applicable end-of-day NAV.

Taxation

The taxation of mutual funds depends on the type of scheme and holding period. Stock investments are also subject to capital gains tax according to the applicable tax provisions.

Why Some Investors Prefer Mutual Funds Over Individual Stocks

Some investors choose mutual funds because they offer features that simplify investing.

• Professional fund management without the need to select individual securities.
• Diversification across multiple investments within a single scheme.
• SIP investment option for regular investing.
• Suitable for investors with limited market knowledge.
• Access to different asset classes through professionally managed portfolios.
• Convenient portfolio monitoring through a single investment.
   

Can You Invest in Mutual Funds and Stocks Together?

Yes. Most investors prefer to invest in both mutual funds and stocks in their portfolio, combining the advantages of diversification and ownership of shares. This means that mutual funds may be used to build the core of one’s portfolio, and stocks will give investors an opportunity to gain access to specific corporations or industries.

Conclusion

Choice of mutual fund and share market investment depends on the financial needs of an investor and the knowledge he/she has. Mutual funds are professionally managed and are diversified; share markets represent owning business directly. It is necessary to understand the difference between mutual fund and share market for investors to choose the method fitting their needs.