If an investor redeems a fund within a holding period, that person has to pay a charge to their fund companies. This is known as the exit load.
Shares vs Mutual Funds: A Complete Guide
Shares are the units of equity ownership in a company. They are shown as financial assets that offer the equivalent distribution of residual profits in dividends. On the other hand, Mutual funds pool money together from many investors, which is later used for purchasing bonds, stocks etc.
Some individuals need clarification on shares and mutual funds by considering both of them the same. However, these two have several differences. To know about the difference between shares and mutual funds in more detail, keep reading.
What Are Shares?
What Are Mutual Funds?
What Are the Differences Between Shares and Mutual Funds?
The differences between shares and mutual funds are as follows.
You need to track your own fund from time to time while investing in shares.
While investing in mutual funds, you do not have to manage and track the movement of shares since experienced fund managers will do it.
Investing in shares may not cause diversification if you invest in variant stocks.
In the case of mutual funds, if the pooled money is invested in different shares, diversification may arise.
Mode of Investment
While investing in shares, you directly invest in specific shares of your choice using a Demat account.
For mutual funds, the fund manager chooses where the money will be invested and conveys a statement showing the units of mutual funds you hold.
Flexibility is comparatively more in shares as you can purchase and sell them whenever necessary.
Flexibility is lesser in mutual funds as everything is planned and executed by the fund managers.
There are no tax benefits when it comes to shares.
As per Section 80C of the Income Tax Act, in the case of mutual funds, deductions of up to Rs. 1.5 Lakhs are allowed within a financial year.
What Are the Types of Shares?
1. Equity SharesEquity shares are the most common type of shares and are also called ordinary shares. They allow investors to enjoy the rights of ownership in the company. The equity shareholders have the right to vote on different issues of the company, and at the same time, they take high risks. Equity shares are transferable, and the amount of profit is paid as dividends in specific proportions. Remember that equity shareholders cannot get a fixed dividend. An equity shareholder’s liability is limited to their amount of investment.
2. Preference Shares
Like equity shares, preference shares offer the right of ownership to the shareholders of a company. However, unlike an equity share, just like its name, it provides preferential rights to some shareholders. This means if a preferential shareholder is assured of getting a fixed dividend, they get priority over other shareholders.
When a company liquidates, its preferential shareholders get their due before equity shareholders. However, preference shareholders neither benefit from the company's surplus profit nor enjoy voting rights.
What Are the Types of Mutual Funds?
1. Open-Ended FundsIn open-ended funds, the units remain available for redemption or purchase all year round. All these redemptions of fund units are done based on the current Net Asset Value (NAV). In general, this type of fund enables investors to hold their investments for an unlimited period. The open-ended funds are appropriately managed and maintained by a fund manager who chooses the places where investments are to be made. Due to active management, these funds charge an additional fee higher than passively managed funds.
2. Close-Ended FundsClose-ended mutual funds possess a specified investment period and a predetermined maturity period. These schemes are used for investment after they are launched by the New Fund Offer (NFO). Investments in close-ended schemes are only made during an NFO period. Furthermore, there is a particular maturity date within which you are not allowed to go for the redemption of the scheme. In a few close-ended schemes, investors can sell their units to a mutual fund house if the fund organisation repurchases them.
3. Interval FundsLike its name, interval mutual funds let you redeem or invest at predetermined intervals. The interval funds feature a combination of open-ended and close-ended funds. They are available for repurchasing of shares at various intervals during fund tenure. The fund management company enables one to repurchase units from prevailing unit holders during these intervals. Generally, interval funds have some windows pre-set by fund managers wherein you can either enter or exit your fund.
Shares vs Mutual Funds: Which Is Better?
Below are some pointers that will help you understand which investment choice is better:
- Shares are prone to market risk. Hence mutual funds are preferred since the amount of risk is reduced by the lump-sum amount invested in different assets. In the case of shares, you will be only able to own a portion of the respective organisation while investing, but in mutual funds, your money is invested in different assets.
- In shares, you have the complete freedom to decide on your own. When it comes to a mutual fund, every design regarding the management and tracking of funds.
- Shares allow you to use the SEP (Systematic Equity Plan) option by which you can invest daily, weekly or monthly in a planned manner. On the other hand, in the case of mutual funds, you can make investments via a Systematic Investment Plan (SIP). By doing so, you can invest a fixed amount regularly.
Having a clear idea about the difference between shares and mutual funds will help you to take investments and related financial decisions effectively and with clarity. Remember that both these investment options include risks. So make sure you read all of their terms and conditions carefully before choosing.
FAQs About the Difference Between Shares and Mutual Funds
In general, there are better times for investing in mutual funds. However, as per the thumb rule, you can invest when the Net Asset Value (NAV) of mutual funds is low and you plan for a long-term investment to increase your returns.
In Latin, pro-rata means ‘in proportion’ or ‘proportional’. Pro-rata allotment of shares is computed by dividing the ownership of each individual by the number of shares and then multiplying the value with the total dividend payment.
The seven-day yield method is computed by considering the net difference of the cost today and seven days ago and by multiplying it with an annualisation factor.
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- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
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