Investment is the key to build great net worth for any individual. However, if you think that you can become rich only by saving your money, then you are wrong!
To become rich and to have a financially secure future, you need to invest your money in the right place. Well, investing can be complicated and very overwhelming at the same time for many. But knowing various investment options and their offerings and advantages in detail can make the path easier. From the different options out there, from stocks and bonds to real estate and PPFs and FDs, whatever you choose, should make money for you in the end. But, if you invest without any knowledge you can be risking out your hard-earned money. Well, the way to minimize the risks and earn great returns is by diversifying the investment. The differentiation can be made based on the risk involved and returns offered. However, before you go for it, it is important to understand and differentiate between different investment portfolios and then start with.
Well, talking about different options, mutual funds, and shares offers great returns but are highly misunderstood by the people. So, if you are also among those who still hesitate to invest in these, then this blog is for you.
Also in present, you will find two investment instruments that 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 are Mutual Funds?
A mutual fund is a company managed by professionals that invests the money of different investors with a proper market study to earn maximum profit. Mutual fund basically pools the investment of the investors who lack time or knowledge to have research on the market. The investments done by the mutual fund are 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.
So, 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.
What are Shares?
If a share is explained in the simplest form, it should be explained as an instrument that allows you to buy ownership of a company. The terms stock, share, and equity all are almost similar and serve 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. However, 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 and vice versa.
The Difference Between Mutual Fund and Shares
From the perspective of an investment option, 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 funds is that while investing in the shares of a particular company gives you partial ownership of a company whereas when you invest in the mutual fund you don’t get any ownership.
- Every mutual fund company appoints fund managers who take all the funding decisions on behalf of the investors. The fund managers of the AMC take 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. Whereas direct investment in shares needs a good ground study and strong knowledge on the market fluctuations of the 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 a 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, a back-end load upon sale, etc. If you invest directly in the share market, what you only need to pay is the brokerage 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 a 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 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.