With the growing popularity of equity funds that invest money in shares, many new investors end up believing that mutual funds and shares are the same. In reality, they are not even close to each other. Read this post to understand how.
Equity or shares is known as one of the most rewarding asset classes. Their popularity has also made equity mutual funds a go-to option for new investors. With little investment knowledge and experience, a lot of new investors get confused between mutual funds and shares. Some even assume that mutual funds and shares are the same. But this couldn’t be further from the truth.
Mutual funds and shares are entirely different concepts and don’t have any direct relation with each other. Let us have a detailed look at mutual funds vs shares to understand better.
When a company needs funding, it can either take a loan or raise capital by selling equity. When you purchase shares of a company, you are purchasing a stake in the company. So, the shares of companies that you get to buy on exchanges such as Sensex and Nifty enable you to acquire a stake in the company.
You purchase the shares at a particular price and sell the same at a different rate. The difference between the buying and selling price is your profit/loss
Mutual funds are an investment option that invests your money in different instruments. For instance, equity funds invest your money in shares of various companies. When you invest in equity funds, you don’t directly purchase shares of any company. You get mutual fund units that are distributed by the fund house.
You invest in a mutual fund at a particular NAV (Net Asset Value) and sell the same at another NAV. The difference in the buying and selling NAV is your profit/loss.
But apart from equity, there are different types of mutual funds to invest in, such as debt, liquid, money market, and more. Some funds combine multiple asset classes like hybrid funds that invest in equity as well as debt instruments.
If investors can directly purchase shares of a company from the exchange, why do people invest in them through mutual funds? It is because investors find it very difficult to select companies that could help them generate considerable returns. Stock selection requires significant knowledge and experience. The wrong choice could also lead to losses.
When you invest through mutual funds, there is a professional team to make the investment decisions on your behalf. This helps you make sure that your money is invested in stocks that have high returns potential.
Some other reasons include:
Mutual funds ensure diversification as funds are invested in several companies
One can start investing with as little as Rs. 500 per month through SIP
Eliminates the need to monitor the markets consistently
Complete transparency and secure online access
While direct investment in the stock market does have great potential, it requires a lot of investing experience and knowledge to pick the right stocks. You should know the right time to enter and exit a particular stock consistently to generate profits from your investment regularly.
If you are new to investments, it is always better to invest through mutual funds. Even most seasoned investors have some part of their portfolio invested in mutual funds. The diversification, flexibility, accessibility, and various options to choose from makes mutual funds a smart choice for every investor.