Difference Between Shares and Mutual Funds: Share Market vs Mutual Funds
Some people confuse shares and mutual funds to be the same. In this article, we will discuss the difference between Mutual Funds & Shares.
What are shares?
Shares represent fractional ownership in a company. For example, if the company has a share capital of 100 shares and owns 5 shares of the company, you have 5% ownership. Thus, shares make you a part-owner of the company.
When the company issues shares to the public for the first time, it is done through an Initial Public Offering (IPO). Once the company shares are listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), they can be bought and sold through the stockbroker.
The company shares its profits with the shareholders in the form of dividend from time to time. The dividend is declared on a per-share basis. As a part-owner of the company, you receive dividends proportionate to your shareholding (Dividend per share x Number of shares held).
As the company's profits grow, the share price also moves up, thus increasing the value of the shares that you hold. The profit realised on selling the shares is known as capital gains.
Types of Shares
There are mainly two types of shares:
These shares are classified as ordinary shares, and they provide a variety of benefits to shareholders, such as voting rights, significant dividends, and so on. Equity shares are exchanged on the stock exchange and are issued at face value.
The following are some of the most common types of equity shares:
- Authorized share capital
- Paid-up share capital
- Issued share capital
- Right share
- Subscribed share capital
- Bonus share
- Sweaty equity share
In the case of a liquidation and dividend distribution, preference shareholders take precedence over equity shareholders. Preference shareholders, on the other hand, do not have any voting rights. Preference shares are typically classified depending on their structure, dividend payout, maturity period, and other factors. The most prevalent types of preference shares are as follows:
- Cumulative preference shares
- Convertible preference shares
- Participating preference shares
- Redeemable preference shares
- Non-participating preference shares
- Non-convertible preference shares
- Non-cumulative preference shares
- Non-redeemable preference shares
Mutual funds are collective investment vehicles. They pool money from investors under various schemes and invest it on their behalf. The investors are issued scheme units in proportion to their investment. A professional fund manager invests the funds. The value of the units changes depending on the movement of the securities held in the portfolio.
Depending on its type and objective, a mutual fund scheme may invest in various securities like equities, fixed income products, gold, real estate, etc. or a combination of these securities. Therefore, diversification of risk is one of the most significant advantages of investing through a mutual fund. In addition, a mutual fund unitholder earns income in the form of dividend or capital gain.
Shares vs Mutual funds
Now that we understand the basics of shares and mutual funds let us understand their differences.
|Definition||They represent a company's ownership.||Investors are comparable to shareholders in that they own and profit from funds or equities.|
|Denomination/Pricing||The value of different stocks can be the same or equal.||It is, in effect, a pool of money collected from investors.|
|Investment Horizon||Stocks can be purchased for long or short periods of time.||Stocks can be purchased for long or short periods of time.|
|Direct/indirect investment||When you buy shares through your stock broker, it is a direct investment. The shares get credited to your Demat account.||When you buy units of a mutual fund scheme that invests in shares, it is an indirect investment in shares.|
|First-time issuance||When the company issues shares for the first time, it is known as Initial Public Offering (IPO)||When a mutual fund scheme issues units for the first time, it is known as New Fund Offering (NFO).|
|Demat account requirement||For buying/selling shares, a Demat account is required.||For investing in an open-ended mutual fund scheme, a Demat account is not required.|
|Control on buying/selling decision||While transacting in shares, you are entirely in control of the decision to buy/sell them. You decide which shares to buy/sell and the quantity.||In a mutual fund scheme, the decision to buy/sell stocks is taken by the fund manager. You have no control over this.|
|Fractional ownership||In the case of shares, you have to buy a minimum of 1 share and in multiples. You cannot buy fractional shares.||In the case of mutual funds, depending on the amount invested and the net asset value (NAV) per unit, you will be allotted units that can be fractional. Also, whatever units you own give you fractional ownership of the entire scheme portfolio.|
|SIP investment option||Some stock brokers offer the SIP option in stocks. In a stock SIP, an investor can choose to invest a fixed amount or buy a fixed number of shares of a particular company or a basket of companies every month.||The systematic investment plan (SIP) option is allowed by all mutual fund houses. However, an investor has to choose a fixed amount to be invested every month in the mutual fund scheme.|
|Diversification||While investing in shares, if you wish to diversify, then you have to do it manually. If you wish to diversify manually by buying all Nifty companies and buy even 1 share of each Nifty company, you will need more than Rs. 1,00,000.||While investing in a mutual fund, diversification happens automatically as the fund manager invests the scheme money in a portfolio of stocks. If you wish to diversify by buying all Nifty companies through a Nifty index mutual fund, you can get fractional ownership of all Nifty stocks through a monthly SIP of just Rs. 500.|
|Cost||When you buy or sell shares, you have to pay brokerage and other transaction fees to your stockbroker. There are depository transaction charges, Demat account opening fee and annual fee.||When you invest in a mutual fund scheme, you have to pay the total expense ratio (TER). There may be an exit load in some schemes depending on when the units are redeemed.|
|Who should invest?||Investing in stocks is suited only for those investors who have good knowledge of overall stock markets and in-depth knowledge of specific companies to decide whether or not to buy their shares.||Investing in mutual funds is suited for all kinds of investors. The investment decisions are taken by a professional fund manager who has a research team to back up his/her investment decisions.|
|Risk involved||A stocks portfolio is usually concentrated and hence entails high risk.||Mutual fund schemes have a diversified portfolio, and hence the risk is relatively lower than a concentrated stock portfolio.|
|How are they valued||A company's share price is a function of the company's financial performance, demand/supply of shares, and investors' perception of the company.||Mutual fund scheme units have a NAV based on the market value of underlying securities held by the scheme.|
|Tax benefit at the time of investment||Investment in equity shares doesn't qualify for any tax benefit at the time of purchase.||Investment in an Equity Linked Savings Scheme (ELSS) qualifies for deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a Financial Year is the amount invested or Rs. 1,50,000, whichever is lower.|
|Taxation of capital gains||If equity shares are sold within a year, then 15% short-term capital gains tax is levied. If equity shares are sold after 1 year, then the first Rs. 1 lakh long term capital gain (LTCG) in a Financial Year is exempt. The incremental LTCG is taxable at 10%||The taxation for equity mutual funds is the same as that for equity shares. In the case of other mutual funds, if they are sold within 36 months, then the short-term capital gain is added to the investor's overall income and taxed as per his/her tax slab. In the case of other mutual funds, if they are sold after 36 months, then the long-term capital gain tax is charged at 20% with indexation benefit.|
|Sale of shares/MF units||The investor has to sell equity shares through his/her stockbroker. The shares will be debited from the Demat account.||The investor has to redeem units with the Asset Management Company (AMC) in an open-ended equity mutual fund scheme.|
Types of Mutual Funds
In a larger sense, mutual funds typically invest in a mix of debt and equity, or one of the two. Mutual funds are often classified according to their maturity time and principal investment.
Based On The Maturity Period
There are three sorts of common mutual fund schemes that fall within this category.
- Open-ended scheme
- Close-ended scheme
- Interval scheme
Based On The Initial Investment
Some of the most prevalent schemes in this category are listed below.
- Debt schemes
- Equity scheme
- Hybrid schemes
Notably, each of these schemes includes a variety of funds with varying risk and return attributes.
The Bottom Line
Given the distinction between stocks and mutual funds, it is clear that both stocks and mutual funds are profitable investments. Regardless, based on their capacities, investors should invest in one of the two.
Before investing, they should consider aspects such as their income, risk-taking aptitude, market knowledge, preferred investment horizon, and financial goals. They can choose between a mutual fund and a stock market instrument based on these factors.
We have understood the differences between shares and mutual funds. For goal planning, an individual should invest in mutual funds rather than directly in shares. You can partner with the Glide Invest App to plan and systematically invest towards your financial goals. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
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Q1: How do we say that Mutual Fund is different from Shares?
A1: A company's total capital is divided into shares. A stock in a firm means you own a piece of it, but a mutual fund collects money from multiple investors and invests it in various assets, including stock in other companies.
Q2: Is it betterA2: to invest in stocks or mutual funds?
If you're a beginner investor with little or no experience in the stock market, it's better to start with mutual funds since not only is the risk lower, but you'll also have a fund manager monitoring your money. In addition, it offers a lower expense ratio than actively managed funds.
Q3: Is it possible to lose money in a mutual fund?
A3: Since the securities held by mutual funds might lose value, you could lose some of your money if you invest in them. As market circumstances change, dividends or interest payments may also alter.
Q4: If I don't sell my mutual funds, do I have to pay taxes on them?
A4: Even if you don't sell mutual funds, you may owe capital gains taxes each year. This is because when mutual fund managers sell equities in a fund (known as the fund's underlying assets) and make a profit, they must transfer the majority of the profit to owners.