Friday 30 July 2021

Difference between Direct Investment in Shares and Investment in Mutual Funds

Shares are the physical representation of a small portion of a company’s value that is traded in the stock market. When a company goes public and issues shares, the combined value of the shares of the company in the stock market and/or owned by persons, constitutes the total value of the company. As a shareholder, owning a small part of the company means that they can take part in the annual shareholder meets.

 

Mutual funds are a collection of stocks and bonds that are managed by fund managers in an Asset Management Company (AMC). If it is an equity mutual fund, it will contain stocks, while debt mutual funds will contain government bonds and securities. A mutual fund is like a huge basket with shares from several companies.

 

Investment in mutual funds is a form of investment in stocks and bonds that is managed by an AMC or investment house, while direct investment in stocks and shares is an active form of investment, where one can handle the purchase and sale of the same himself. 

 

The following are the key differences between investment in shares and mutual funds:

 

Direct Investment in Shares

Investment in Mutual Funds

Shares are a part of a business’s growth strategy.

Mutual funds are investment options for investors.

Trading in shares requires the shareholder to have a demat account.

Mutual funds do not need a demat account.

An investor has no control over the actual choice or trade of stocks.

Mutual funds are a portfolio of stocks of companies pre-determined and altered by a fund manager.

Direct investment in shares requires strong knowledge of the stock market and company performances. It is a hands-on activity involving quick market decisions and is better for experienced stock traders.

Mutual funds are managed by a fund manager in an AMC. This external management of the portfolio ensures that there is direct involvement on the part of the investor except at the time of choosing the fund. For this reason, mutual funds are ideal for a new investor who does not know much about the stock market.

Direct investment in shares requires more time and dedication.

The passive nature of mutual funds makes it easier for anyone and everyone with money to take part in it.

A shareholder cannot make a fixed investment in shares directly as the prices fluctuate constantly and need personal attention and prompt trade decision.

Anyone can invest in mutual funds through a fixed monthly Systematic Investment Plan (SIP), as it is managed by a professional.

 

Direct investment in stocks does not offer the protection from negative returns and makes the stocks volatile. Unless anyone is dealing in a significant number of stocks at the same time, their money will be at high risk.

 

As mutual funds hold a diversified portfolio, negative returns are cushioned by the other stocks that do well.

Investment in shares could give quick returns if anyone buys and sells at the right time and chooses high-growth stocks.

Mutual funds have a longer-term growth trajectory and will give good returns only after 5-7 years.

In case of direct investment in shares, shareholders need to pay brokerage to the stock broker.

In case of mutual funds, a mutual fund holder needs to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc.

While dealing with shares, shareholders may not be able to juggle with a large portfolio.

It is easier for mutual fund holders to diversify the portfolio using mutual funds as there are options such as hybrid funds.

Direct investment in shares can give tax benefits only under Section 80CCG of the Income Tax Act.

Tax benefits on mutual funds can be claimed under Section 80CCG as well as 80C of the Income Tax Act if it is an Equity-Linked Savings Scheme (ELSS).

 

Whether a person invests in shares or mutual funds depends on their knowledge and experience of the market and the amount of time they have. Mutual funds are a great investing instrument if such people are a dilettante and aim for a steady growth of wealth. But if a person is a stock market virtuoso and has enough time in hand, direct investment in shares is a better choice.

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