Mutual funds and stocks/shares both can be a great way to create long term wealth. However, both these investment avenues are unique in their own way which is why it is essential for everyone to know the difference between these two to determine which is more ideal for their financial goals.
A share is a unit of the entire financial wealth of the company. Whenever a company needs financial resources for expansion and growth, it decides to go public. The company then issues shares to the public for a discounted price. Once the company is listed on the stock exchange, investors can trade in these shares by buying or selling them to make a profit. In stock market terms, a basket of shares is referred to as stock.
A mutual fund is a professionally managed investment vehicle that invests in a portfolio of securities belonging to various publicly listed companies. It pools financial resources from various investors sharing a common investment objective and spreads its portfolio across various asset classes, money market instruments, currencies, and even international markets.
|Diversification||Mutual funds offer diversification as they spread their investments across market cap in companies belonging to various sectors and industries||A single investment in shares does not offer any type of diversification and investors will have to invest in multiple stocks to create a diversified portfolio|
|Portfolio management||Mutual funds are managed by a team of portfolio managers who along with market researchers and analysts choose stocks with growth potential and actively manage the portfolio by buying and selling securities to leverage lucrative market conditions and generate returns||When you invest in shares, you are the sole person responsible for your investments are there is no fund manager or portfolio manager to actively manage your investment portfolio|
|Risks||Mutual funds offer active risk management by spreading their portfolio across various asset classes and fixed income securities, they minimize your overall investment risk||Shares carry a huge concentration risk as you can lose your money if the shares in which you invested start to perform negatively|
|Investment method||Mutual fund investors need not make a direct investment as that is the duty of the fund manager. The fund manager assesses market risk and builds a portfolio of underlying securities. When you invest in a mutual fund you buy units of that fund, thus holding a small percentage in all the underlying stocks||To invest in stocks, investors can place their order to the broker or directly purchase or sell shares from any of the online portals made available by the AMC/bank/aggregator. When they buy shares, these are parked in their demat account. To trade in the stock market, investors need to have a demat account|
|Flexibility||Since investors have no say in the investment decisions which the fund managers make, mutual fund investors do not have the flexibility to change the portfolio composition of the scheme||Investors to invest in the stock market have total control over their investments and can choose to buy, hold or sell their shares at any given time|
|Tax benefit||Not all mutual funds have tax benefits, but Equity Linked Savings Scheme (ELSS) is a tax saving fund that comes with a three year lock-in and tax benefit. Investors can save tax every fiscal year by investing up to Rs. 1.5 lacs in an ELSS fund.||There are no such tax benefits for buying or selling shares of a company.|
To know which investment is ideal for you, please talk to your financial advisor.