Investment is the key to own a great net worth for any individual. If you thought of becoming rich only with your salary and your savings then sadly you are ‘wrong’!
To become rich, you need to invest your money in the right place. Yes! Your investment can be multiplied only if you invest your money in the correct financial instrument but sadly here only where most of the investors get confused. Choosing the right place to invest your money is the trickiest thing that an investor has to do.
If we study the present financial market, we can find only two investment instruments which are in the highest demand. The first is the Mutual Fund and the second one is investing in Shares. Once again choosing the better among the bests needs to be aware of the pros and cons of both instruments. Before we dive deep and start comparing, let’s have a look back and reintroduce both the instruments.
What Is A Mutual Fund?
A mutual fund is a trust which is managed by professionals that invest the money of many investors on behalf of the investors. A mutual fund company pools the investment of the investors who lack time or knowledge to have a research on market and take risks of investing. A mutual fund collects the investment of various investors and invests the same amount with a proper market study to earn maximum profit. The investments done by the mutual fund is well diversified to offset potential losses. Fund managers of mutual fund companies make sure that the investment is done on different platforms such as securities like stocks, bonds, short-term money market instruments and commodities such as precious metals. By investing your money in a mutual fund, you permit the portfolio manager or the fund manager to make those essential decisions on behalf of you. Whatever profit one will earn by capital appreciation, will be shared by its unit holders or the investors and the mutual fund trust.
What is Shares?
If a share is explained in the simplest form, it should be explained as an instrument which allows you to buy ownership of a company. The term stock, share and equity all are almost similar and serves the same purpose. Shares are the small portion of a big company’s value. So when you buy some shares of a particular company, you share the ownership of that company with other shareholders. One can buy shares of a company when the company goes public and issues shares. One can buy or sell stocks of such listed companies on a stock exchange (which is nothing but a marketplace). The value of the share is determined by the fundamental dynamics of demand and supply. As the company grows, the shareholder can earn more and more profit or vice versa.
The Difference Between Mutual Fund and Shares
From the perspective of an investment instrument, both have some advantages and disadvantages. Here is a comparison between the both which will be helpful to make up your mind on choosing one.
- The first difference between shares and mutual fund is that shares make you a partial owner of a company whereas mutual fund is an investment instrument for individuals.
- Every mutual fund company appoints fund managers who take all the funding decisions on behalf of the investors. The fund managers of the AMC takes all the important decisions like where to invest, when to invest and how much to be invested. So mutual fund becomes an ideal investment instrument for the investors who are new to investing. Direct investment in shares needs a good ground study and strong knowledge on the market fluctuations of share market.
- One can invest and earn a profit by investing in shares only if he/she invests much time and dedication to it. The investment in mutual fund happens in the passive way hence the primary investor needs not to worry much about the investment decisions.
- When you start trading in the share market, you will need a demat account without which buying or selling shares is not possible. But if you invest in mutual funds, you don’t need any such account.
- While investing in a mutual fund, you can invest a systematic way which is called SIP. Such systematic plans help you to be disciplined in finance. The investment which you do every month is handled by the fund manager. In another hand, while investing in shares you need personal attention and prompt trade decision to continue the investment every month.
- While investing in a mutual fund, you need to pay fund management charges, early redemption charges, a front-end load upon initial purchase, back-end load upon sale, etc. If you invest directly in the share market, what you only need to pay is the brockage to the stoke broker.
- Every investor knows that a diversified portfolio is the best for earning maximum profit with minimum risk. One can easily have a diversified portfolio if the investment is done by mutual funds. But while investing directly, creating such a large diversified portfolio is a really confusing task.
- Another benefit of investing in the mutual fund is the tax benefit. If you invest in ELSS you can save tax up to 1.5 lakhs under Section 80CCG and 80C. Whereas the profit earned in shares is a taxable income.
- The profit which you earn by investing in the mutual fund is shared by the investor and the AMC. But the earning in the share market is your sole income and no one can take a share of it.
- The risk factor is always present in all kinds of investments, whether it may be a mutual fund or in shares. But the negative returns in a mutual fund can be cushioned by the diversification. The investment in a mutual fund is done with different instruments such as stocks, bonds, securities etc. A mixed portfolio is created by the fund manager which ensures the maximum profit and minimum loss. The direct investment in stocks is riskier as it makes your stocks volatile. If you invest only in single stock, you may either earn a high profit or you may have to face a capital loss. The risk is always very high in shares.
The Last Words
Both Mutual fund and share market can fetch you profit but it matters how much of time and effort you are able to put on it. Above all, the capability of taking risks also plays a vital role in earning a profit. If you are still puzzled by the questions like where to invest money, how to invest in shares, whether investing in shares can earn a profit or not then it is better to go with mutual funds. The equity investments done by AMCs are handled by professionals hence the chances of potential losses are less. But if you have a sound knowledge of stock market and have enough time in hand then the direct investment is the better way to earn maximum profit.