Difference Between Shares and Mutual Funds
Last Updated :
21 Aug, 2024
Blog Author :
Wallstreetmojo Team
Edited by :
Aaron Crowe
Reviewed by :
Dheeraj Vaidya
Table Of Contents
Shares vs Mutual Funds Differences
Shares refer to the units of the ownership interest a person holds, representing an equal proportion of the company's capital. They are riskier when compared with mutual funds as they are vulnerable to changes in market conditions. In contrast, mutual funds refer to investment schemes in which the amount of money is collected by the fund houses invested in diversified areas. The same is less risky because of the diversification as the money is invested in the diversified areas, compensating the performance of one security with another and reducing the overall risk.
When we invest in an individual share, the risk is higher. We expect the percentage to do well shortly, but if, unfortunately, it doesn’t, we lose a handsome amount of money. Now, what if, as an investor, we invest the same amount of money in mutual funds instead of individual shares? It will be beneficial for us if one share doesn’t yield better returns, another will. Diversifying will help us pare down the risk as much as possible.
Plus, investing in mutual funds is much more convenient. You don’t need to pick up the top 20 high-performing shares. Mutual fund companies hire experts to help you select. As a result, you pay a monthly amount, and you earn a great investment return at the end of a few years.
At the same time, when you trade shares, you need to sell out the shares that aren’t doing well. For individual investors, the trading cost is relatively high. But for mutual funds, you don’t need to worry about the trading cost. The expenses for running the fund would be charged against the money investors invest in the mutual funds.
Table of contents
Mutual Funds vs Shares Infographics
Key Differences
- One of the key differences is the level of risk. When you invest in shares, you risk more than in mutual funds. Why? A mutual fund includes many shares in the portfolio, and if one does poorly due to a poor manager/strategy/misfortune, other shares can back it up.
- Investing in shares isn’t a good idea for a newbie. It takes a lot of study, practice, and understanding of the share market to make good money. On the other hand, in mutual funds, anybody can make money since qualified fund managers manage the mutual funds.
- Share investing isn’t very convenient. It would help if you did your due diligence before finding the right shares. Investing in mutual funds, on the other hand, is so easy. Just do some research, look through the stocks included in the funds, look at the records, and you’re done.
- You need to pick the right mutual fund. For every mutual fund, diversifications come as a feature. To diversify your investments, you must pick the right shares per your needs (more return-more risk, medium return-medium risk, etc.).
Comparative Table
Basis for comparison | Shares | Mutual Funds |
---|---|---|
Reason for Investment | Return is higher, as well as risk. | Return is somewhat lower as the risk is lower than investing in shares. |
Risk | Riskier than mutual funds. | Less risky. |
Convenience | There’s almost no convenience in investing in shares. It would help if you studied hard to know what shares to pick and what to sell out. | Mutual funds are very convenient as mutual fund managers are there to think for your best interest. |
Research | To pick the right shares, you need to do your research. | You need to do your research for mutual funds, but mutual funds don’t take much time. |
Diversification | To diversify, you must find the right shares or invest in them. | To diversify, invest in the right mutual funds. |
Trading costs | You must pay a lump sum trading cost to buy and sell shares. Usually, trading costs remain on the higher side. | There’s also an expense for mutual funds. The cost is recouped against the money investors pay for mutual funds. |
Conclusion
Shares and mutual funds are different types of investments. And as per the individual's need and risk appetite, one should pick the investment. If one is confident that they can take a huge risk (and want to generate a better return on investment as a result), investing in individual shares is a good option.
On the other hand, if one wants to pare down the risk but wants to generate better returns than fixed deposits, mutual funds are the best bet. You can also do both and see for yourself what works for you.
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