Have you been investing somewhere? Are you saving your hard earned money in bank fixed deposits? There are many ways you can save money and get amazing returns. Share market is the most famous platform and is considered best to get high returns in less time. However, sometimes it comes with great risk.
Are you a beginner in investment business? Then it would be best if you went for mutual funds. In this article, we are going to tell in brief about the difference between shares and mutual funds.
When you invest in the stock market, you invest in a single business. Usually, when organisations need to expand their business, they either raise money by borrowing from Banks or by offering shares. Investors like you will buy, and in return, they become the valuable stakeholder. In mutual funds, you do not invest in a single business. When you buy a fund, you are buying units. The Asset Management companies offer you units in return for your money. This money is reinvested in other small to medium scale businesses. The new asset value of the mutual fund is multiplied by the number of units that you have. The multiplication is the amount you earn from mutual funds. The net asset value varies as per the stock market. In short, investing in share market means investing in one business. Whereas investing in mutual funds means investing in various businesses. The Asset Management company has fund managers who handle the investment. These fund managers invest your money in different promising businesses.
Since buying a share means investing money in a single business, the risk increases. If the business does well, the profits are higher in short term. But if the market drops and your share value decreases, the loss is also high. Since mutual funds invest your money in different companies ( let’s say 20 ), the risk is less. Let us assume 5 out of 20 are in loss. But the other 15 can recover the loss even in slight profits.
1. To invest in shares, you need to pay some fee in the form of brokerage. You also have to pay some maintenance charges annually. In mutual funds, you need to pay entry load and exit load. You also have to pay early redemption charges.
2. When you invest in mutual balanced funds, you are not restricted to invest in only shares. You can invest in government bonds, debt securities, corporate bonds, gold, real estate, commodities, etc. There are various mixture options available in mutual bond funds. You can invest some percent of the amount in debt and some percent in the equity market. This is called a hybrid fund type.
3. If you were investing directly in shares, you can get tax benefits under Section 80CCG. In mutual dividend funds, you can get tax benefits under Section 80CCG as well as 80C if it is an Equity-Linked Savings Scheme (ELSS).
4. Mutual funds let you invest a particular amount monthly. It is called a systematic investment plan (SIP). This facility is not available in shares.
5. It is suggested to invest in shares only and only if you have a thorough knowledge of the share market. Those who do not have enough knowledge of the market can invest in mutual funds. Also, mutual funds deliver good results after some years i.e. it is suitable for those who are ready to invest for the long term. Share market, however, can deliver best returns in one day also. Depending on the market.
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These were the few important differences between shares and mutual funds. It is recommended to consider all points before actual investment. Investing your hard-earned money is a responsible task. One should read and study all aspects of share market and mutual equity funds before actually investing. Usually, the best time to invest in shares and mutual funds is when the market is low. The shares can be bought in less amount. Similarly, mutual funds investors can buy more units in less amount when the market is low. Usually, people get panic when the market drops and tend to take out all invested money. This is the most incorrect way of investing.