If you want to invest your money and want to earn good profits than both mutual funds and share market can be a very good option but both markets require a different strategy and goals to earn returns. An investor must understand the key difference between mutual funds and shares before investing its valuable money.
What are shares?
Usually, a company issue shares to raise funds and also to increase the company’s value in the market. Shares are a good option for any company to raise capital so that a company can further grow its business and can start new projects.
Buying shares of a company simply means having a portion of ownership in a company, Shares can be bought in large to the small quantity that usually depends on the financial capacity of the investor.
Shareholders are bound with a company’s profit and loss, if a company generate good revenue so that its shareholders and if the company suffers a loss so its shareholders also face looses. Shareholders usually earn revenue from two ways, one is an increase of share value from the purchase price as the company grow its share value also increase and the second way is revenue through dividend, a company pay dividend as extra bonus profit to its shareholders when company generate excellent profit in business.
Shares can be bought for any duration of time as investors desire, shares can be bought in short, medium to long term duration.
What are mutual funds?
Usually, mutual funds are combined investment option in which investor has options to put his money in different type of bonds, securities, shares and gold etc. Mutual funds offer you a diverse portfolio which can offer best possible return on your investment with lower risk. In mutual funds investment, your portfolio is always managed by professional fund managers or broker firms.
Types of mutual funds
Equity mutual funds – Equity mutual funds refer to those mutual fund schemes in which an investor invest majority of its funds in equity-related instruments such as shares. Equity mutual funds offer an investor to invest its money in small, mid or large-cap companies, which usually depend on goals and risk tolerance of an investor.
Debt mutual funds – Debt mutual funds refers to those mutual fund schemes in which an investor invest the majority of its funds in debt related schemes such as bonds or fixed deposit plans. Debt mutual funds are not affected by market volatility so it is a good investment option for those investors who want to invest in low-risk schemes.
Hybrid mutual funds – Hybrid mutual funds are a combination of both equity and debt instruments. In this mutual fund schemes portfolio is planned to earn the best possible return from a combination of equity and debt instruments.
The key difference between shares and mutual funds
Volatility – Shares generally has a lot more market volatility as compared to mutual funds because of high volatility in share market, an investor has a chance to earn more profit but at the same time high volatility also represent high chances of loss. On the other hand, mutual funds have a lot less volatility because mutual funds always have a diverse portfolio because mutual funds invest in multiple schemes such as bonds, shares and fixed deposits. Future of mutual fund investments is always very much predictable most of the times. Mutual fund schemes don’t provide high returns as share market but mutual fund investments are risk-free so a new investor can invest its valuable money without the risk of losing.
Monitoring of investment – Share market has high volatility which results from fluctuations in share price, the share market is directly affected by the trend of the company or its sector if a company is moving in an uptrend than its share price increase if a company is moving in downtrend than its share price decline. You always need to have daily or weekly news and updates about your share market investment so you can decide whether to hold or sell your shares.
Mutual fund investments are always managed by professional fund managers, They are always monitoring market trends on your behalf. Mutual fund schemes have a diverse portfolio so these investments are very stable and secure but it is always recommended to have monthly updates about your mutual fund investments.
Duration of investment – In the share market, you have various time duration options on your investment such as short term investment in which you can buy shares of the company for less than one-month duration, you also have mid and long term investment options where you can invest your money for 1 to 10 years plan.
On other hand, most of the mutual fund schemes work on long term strategy because mutual funds invest money in fixed deposits, bonds and blue-chip stocks which give a safe and stable return on long term investment.
Experience requirement – In share market investment you need basic experience about share market and another important aspect of shares. Your share broker can help in picking up suitable shares for your investment but you also have to analyze shares and company’s fundamentals before investment so it is important to get basic knowledge before investing in share market.
In mutual funds beginner invests with very little knowledge can invest money because most of the time your investment is closely monitored by professional wealth managers.
Start of investment – To begin your investment in share market requires a lot of paperwork and documentation. You need Demat and trading account to start investing in the share market, To open a Demat account usually requires 7 to 10 days.
To begin your investment in mutual funds doesn’t require any demat or brokerage account, you can start your investment within a day after registering with mutual funds platform.
To start any investment you need basic knowledge about financial markets and instruments although mutual funds investment requires very little knowledge to start as compared to the share market. Mutual funds are stable so it is suggested for beginners to start mutual funds once the experience is gained then you can also start investing in the share market.