The most significant difference between shares and mutual funds is that shares carry a high level of risk, and the investors do not get diversification benefits. In contrast, mutual funds have a lower level of risk through investment in diversified instruments. Both instruments are market-linked, and their performance is subject to market conditions.
Difference Between Shares And Mutual Funds
| Factors | Shares | Mutual funds |
| Form of investment | Buying shares is a direct form of investment. | Investing in mutual funds is an indirect way to invest in shares. |
| Risk | Highly risky due to volatility in the market. | Risk is low due to a diversified portfolio. |
| Charges | Brokerage charges and other charges like stamp duty | Expense ratios and exit load |
| Returns | There is no limit on the returns you can earn on buying a particular share of a company. | Returns on the mutual fund can range from 8 to 15% (Depending on the market conditions) |
This article covers:
- What is a Share?
- What is Mutual Fund?
- Mutual Funds vs Stocks
- How to invest in share market and mutual funds
- Difference Between Shares And Mutual Funds- Quick Summary
- Difference Between Shares And Mutual Funds- Frequently Asked Questions
What Is A Share?
A share is the unit of total equity that every investor holds. The ones who invest in any company’s shares are part of the profits in the form of dividends and losses as well, up to their share amount. Simply put, when you invest in a company through shares, you will get a piece of the pie, which means a part of the total shareholding.
Different types of shares trade daily on the stock exchanges (NSE and BSE), and their prices fluctuate in real-time. Stocks vary in risk and return, with large-cap stocks offering more stable returns with lower risk, mid-cap stocks offering higher returns but with higher risk, and so on.
The shares are offered both in the primary market in the form of IPOs and the secondary market for trading. When the market price of a share rises, the investor will earn from it by selling it at a higher price and can also get a dividend from the company if it declares one.
The capital gains from the shares can be of two types: short-term capital gains (STCG) if the shares are sold within 12 months, and long-term capital gains (LTCG) if the shares are sold after 12 months. The STCG is taxed at a rate of 15% after deducting its expenses. The LTCG of more than ₹1 lakh attracts a tax rate of 10%. The dividend earrings are taxed based on the investor tax slabs in which they are falling.
What Is Mutual Fund?
A mutual fund is a pool of money collected from various investors and then invested in different instruments such as stocks, debentures, money market instruments, etc. They are managed by a professional fund manager, who will decide on investing in various securities under the mentioned guidelines.
In return, each investor will get the units of a mutual fund. The price at which an investor can get a unit of a mutual fund is the NAV or net asset value. Suppose the NAV of a mutual fund scheme is ₹100, and if you are investing ₹1,000, then you will get the ten units of a mutual fund.
The NAV is calculated at the end of the day when the market closes on the basis of the price of the underlying securities. All the expenses of managing the mutual fund will be deducted from the underlying asset’s value, and the resulting value will be divided by the number of outstanding shares to get the NAV. The income earned from the various instruments is then distributed to each unitholder proportionately based on how much they hold.
Equity funds invest at least 65% of their portfolio into stocks across different market capitalizations and sectors, which makes them riskier but can also provide higher returns. Debt funds invest at least 65% of their portfolio in government securities, money market securities, and bonds, which carry lower risks and provide stable returns. Hybrid or balanced funds invest in a mix of equity and debt instruments, which can provide higher returns than debt funds but carry a lower risk than equity funds.
Mutual Funds vs Stocks
The key difference between mutual funds and stocks is that mutual funds are managed by expert professionals like fund managers who are responsible for doing thorough research on stocks and market conditions and investing accordingly. On the other hand, stocks can be bought and sold directly, and the investors are solely responsible for the profit and loss.
Mutual Funds vs Stocks – Level of Risk
Stocks are riskier because they lack diversification benefits and real-time market fluctuations, whereas mutual funds provide diversification benefits and carry lower risk levels.
Mutual Funds vs Stocks – Return
Stocks provide the investor with the opportunity to earn inflation-beating or higher returns, whereas mutual funds provide higher returns than traditional instruments such as FDs but not as high as stocks.
Mutual Funds vs Stocks – Diversification
While investing in stocks, the investor loses out on the chance of diversification, whereas in mutual funds, the investor gets access to various instruments in a single scheme. Therefore, diversification is greater with purchasing a mutual fund unit than investing in a single stock.
Mutual Funds vs Stocks – Management
Stocks must be managed by the investor, whereas mutual funds are managed by a professional fund manager appointed by a fund house.
Mutual Funds vs Stocks – Control on Investment
Though the investor can take the help of an analyst while investing in stocks, they still have full management control, whereas, in mutual funds, the investor lacks full control over where the fund house is investing the money.
Mutual Funds vs Stocks – Knowledge of the Market
With stocks, the investor is generally required to have full technical knowledge of the market for successful investing, whereas a mutual fund does not demand any knowledge and anybody can invest in them.
Mutual Funds vs Stocks – Cost of Investment
The cost of investing in stocks is less as compared to mutual funds because it only charges brokerage fees on the Demat account, whereas mutual funds charge a fixed percentage of the expense ratio, which includes the maintenance fee, fund manager fee, etc.
Mutual Funds vs Stocks – Investment Style
The investment style is aggressive in stocks and is more suitable for investors with a high appetite for risk. In contrast, mutual funds are more suitable for passive investors who don’t like to manage their investments and who want to minimize the risk.
Mutual Funds vs Stocks – Investing or Trading time
Stocks can be traded on working days between 9:15 AM and 3:30 PM at the current price, whereas mutual funds can be invested at any time, but the NAV is fixed at the end of the day. If an investor purchases mutual funds between 9:00 AM and 3:00 PM, the same day’s NAV is applicable, but if purchased after 3:00 PM, the NAV of the next day applies.
Mutual Funds vs Stocks – Investment Amount
Stocks require huge amounts to invest at a time, whereas mutual fund investments can be started for as ₹100 with a SIP where the investor can pay in installments.
Mutual Funds vs Stocks – Tax Savings Benefits
With ELSS mutual funds, the investor can save up to ₹1.5 lakhs every financial year under Section 80C of the Income Tax Act, 1961. However, stocks do not have such tax benefits.
Mutual Funds vs Stocks – Right Time to Invest
In stocks, the investor is required to analyze the right time to buy or sell the order, whereas in mutual funds, especially with SIP, there is no need to analyze the market and the investment can be started anytime, whether the market is bullish or bearish.
Mutual Funds vs Stocks – Investment Type
When investing in stocks, the investor receives a percentage of the company’s ownership, whereas investing in mutual funds results in a fraction of a unit holding in a mutual fund scheme. Therefore, investing in stocks leads to a company’s growth, and mutual funds are just a simple investment tool.
Mutual Funds vs Stocks – Regulation
Stocks and mutual funds are both regulated by SEBI (the Securities and Exchange Board of India), but for each type of mutual fund, the SEBI has provided certain guidelines on where they can invest, whereas in stocks, there is no such regulation.
Mutual Funds vs Stocks – Taxation Rules
The taxation rules of stocks are much simpler than those of mutual funds because every mutual fund is taxed differently based on its different periods of short-term and long-term capital gains, which are simpler in the case of stocks.
Mutual Funds vs Stocks – Demat Account
For stocks, it is mandatory to have a Demat account to hold their certificates, but for mutual funds, there is no such necessity to have a Demat account. One can invest in mutual funds through different AMC’s websites, but investing through a Demat account helps the investor keep track of all their investments in one place.
How To Invest In Share Market And Mutual Funds?
To invest in the share market and mutual funds, follow these required steps:
- Open a Demat account with Alice Blue by completing the full KYC process and ensuring it is linked to your bank account.
- Log in to your Demat account on a mobile app or through a stockbroker’s website.
- Select a stock you want to invest in by doing the proper technical and fundamental analysis. For mutual funds, select from various types of mutual funds based on your investment goals and the fund’s past performance, fund manager’s experience, AMC reputation, etc.
- Pay through your bank account, and then the stocks or units of a mutual fund, whichever you have invested in, will be reflected in your demat account.
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Difference Between Shares And Mutual Funds- Quick Summary
- The difference between a share and a mutual fund is that share is a direct investment where an investor gets ownership of the company on a proportionate basis. Whereas a mutual fund is a pool of money collected from small investors to invest in different instruments.
- The difference between mutual funds and stocks is that stocks are riskier but can provide higher returns than mutual funds.
- Mutual funds provide diversification benefits and are managed by a professional fund manager, whereas stocks give investors full control over their investments.
- The cost of investing in stocks is less than that of mutual funds, and the investment style is more aggressive in stocks.
- One can invest in the share market and mutual funds with the help of a Demat account by selecting from the list and making payments for the same.
Difference Between Shares And Mutual Funds- Frequently Asked Questions
The difference between shares and mutual funds is that in shares, you have to select the stocks by yourself, while in mutual funds, your money is invested by a fund manager in different instruments.
Stocks can be much more profitable than mutual funds because the stocks can give short-term returns with intraday trading, but with mutual funds, you can only benefit in the long run.
Yes, mutual funds can be better than stocks for the investor who wants portfolio diversification, has a low-risk appetite, and wants the fund manager’s expertise.
Mutual funds are safer than stocks because they provide risk diversification benefits through investing in various instruments and being managed by an expert fund manager.
Yes, you can lose money in mutual funds because they invest in securities that are linked to the market, and their fall will lead to a fall in the fund’s performance.
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