Are you planning to invest in equities? You may have heard the terms stocks and mutual funds. What are stocks and mutual funds and what is the difference between them? How does investing in one compare with the other?
Stocks and Mutual Funds
It is important to understand what is a share and a mutual fund, and their distinctions:
Stocks: Stocks or shares imply ownership of a company. Each stock is a unit of ownership interest in a company. Stockowners are entitled to profits of a company, which may be paid out in the form of dividends.
Mutual Funds: A Mutual fund investment may include securities such as shares, bonds, corporate papers etc. depending on the investment objective of the fund. Equity mutual funds for example, invest in shares and equity linked instruments.
Differences between stocks and mutual funds: You can buy shares of a company from the stock exchange; this is called investing in stocks. If you buy units of an equity fund, your investment will, in turn, be used to buy shares of companies from the stock exchange. The fund’s fund management team will decide which stocks to select and will monitor these investments. In other words, the mutual fund becomes a route to equity investment.
Advantages of Mutual Fund Investment
There are a number of pros and cons of investing in mutual funds:
Mutual Funds
Pros:
Diversification: Mutual funds are made up of investments across sectors, asset classes and securities based on the fund’s investment objective.
Professional fund management: The mutual fund house will assign a professional fund manager for manage the fund’s investment portfolio.
Low trade costs: Investors do not need to pay trading costs for various securities that MFs hold.
Low fee: Mutual funds typically levy nominal fund management fees.
Easy access: Mutual funds are ideal for investors who don’t have the time or inclination to invest on their own.
Cons:
Expense ratios: Investors may have to pay up to 2.5% in expense ratios
No ownership interest: A mutual fund does not give an investor voting rights or ownership interest in a company.
Shares
Pros:
Liquidity: Shares are highly liquid and can be usually sold and bought easily.
No fee: Shares do not come with annual or periodic fee
Ownership: Shares provide you with business ownership and a voice in the company’s affairs.
Cons:
Trading and holding costs: You will need to pay brokerage and demat account fee for share trading.
Diversification requires skills: You will need to be able to pick stocks across sectors and companies to diversify your portfolio by yourself.
Shares or Mutual Funds
Here are the fundamental differences between Shares and Mutual Funds.
Whether you invest in shares or mutual funds will depend on what type of investor you are and what your financial goals are. Mutual funds though are beneficial for a wide variety of investors who are looking for an easy and diversified route to the stock markets at low costs.
