Achieving financial success through investments requires careful consideration of various options, particularly when deciding between mutual funds vs share market. Shares offer direct ownership in a company, while mutual funds pool funds from investors to buy a diversified portfolio of assets. Each investment choice comes with its own set of risks and rewards, making it essential to fully understand the dynamics of each before making a decision.
The future of investing is rapidly evolving with the growing influence of global, financial trends and emerging technologies. Staying informed and adaptable is key to navigating these changes successfully.
Let’s explore shares and mutual funds to help you make more informed investment choices tailored to your financial goals.
Understanding the Meaning and Types of Shares
When purchasing shares or stocks, investors automatically become stakeholders of a company. As a stakeholder, you can get a percentage of the company’s profits and absorb its losses. Also, shareholders can receive distribution payments as dividends and have the ability to vote on corporate decisions when such rights exist.
The stock exchange determines share prices according to companies’ performance and market conditions. The issuing companies categorise their shares into different types, each providing various rights and advantages for shareholders. Here are the different types of shares that companies offer:
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Equity Shares (also known as Common Shares)
Equity shares are the most common type of stock. These shares grant owners voting rights and ownership in the company. Shareholders of equity shares are eligible to receive dividends, but their claims to company assets are secondary in case of liquidation. The value of equity shares is highly influenced by market movements and the company’s performance.
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Preference Shareholders
Preference shares are given priority in receiving dividends and repayment during company liquidation. However, they typically do not carry voting rights.
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Bonus Shares
Bonus shares are additional shares issued by a company to its existing shareholders at no cost. These shares are distributed in a predetermined ratio based on the shareholder’s current holdings, effectively increasing their investment without requiring further capital.
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Right Shares
A company can issue rights shares to allow existing shareholders to purchase additional shares at a discounted price before they are offered to the public. This helps to maintain their trust and ownership stake in the company. However, the number of right shares a shareholder can acquire depends on their existing shareholding.
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Convertible Shares
Convertible shares provide investors with the option to convert their shares into another type of security, such as equity or debt, under predefined conditions. These shares may typically offer higher returns depending on the market’s performance.
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Growth Shares
Growth shares are issued by companies that prioritise reinvesting profits over distributing dividends. These shares are designed for investors seeking long-term capital appreciation rather than immediate income.
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Voting and Non-voting Shares
Non-voting shares allow investors to receive dividends but do not provide voting rights in company decisions. On the other hand, voting shares grant shareholders decision-making power.
Significance of Investing in Mutual Funds (MF)
One of the key advantages of mutual funds is their ability to spread investments across a wide range of asset classes, reducing the risks associated with investing in individual securities. The choice of a mutual fund depends on an investor’s financial goals, risk tolerance, and investment horizon. Below is an overview of the different types of mutual funds:
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Equity Mutual Funds
Equity mutual funds primarily invest in stocks, aiming for higher potential returns. While these funds offer significant growth opportunities, they also carry higher risks due to market fluctuations.
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Debt Mutual Funds
These types of mutual funds invest primarily in bonds and fixed-income securities to deliver dependable returns at lower financial risk levels. These funds are preferred by investors looking to obtain a consistent income.
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Hybrid Mutual Funds
The hybrid nature of these mutual funds allows investors to invest in both equity and debt instruments. Hybrid funds are ideal for investors seeking moderate risk and reward potential, making them a suitable choice for those with a medium risk tolerance.
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Index Funds
Such types of funds operate through tracking and duplicating the movements of recognised market indexes like NIFTY 50 and S&P 500. These funds follow a passive management strategy with reduced expense costs.
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Equity-Linked Savings Scheme (ELSS)
ELSS funds offer the dual benefit of investment growth and tax savings under Section 80C of the Income Tax Act. This makes them an attractive option for investors looking to reduce their taxable income while aiming for capital appreciation.
Difference between Shares and Mutual Funds
Understanding the conceptual difference between shares and MF is crucial for an investor to make informed decisions. The table below shows key differences between MF and shares:
| Factor | Shares | Mutual Funds |
| Ownership | Direct ownership in a company. | Indirect ownership of multiple assets under a pool of funds. |
| Investment Method | Individual investors select and buy shares directly from the stock market. | Investors contribute funds and fund managers decide where to invest. |
| Risk Level | The risks associated with shares are high since there are frequent price fluctuations because of market trends and economic conditions. | Risks are lower in MF because of diversification. However, they are still subject to market risks. |
| Returns | Returns are potentially higher in shares because of their high volatility and depend on market movements and company growth. | Moderate and stable returns that depend on fund management, allocation, and performance. |
| Management | Investors must continuously analyse the stocks and have active involvement in their buying and selling. | Fund managers professionally manage the funds making it suitable for passive investors. |
| Diversification | There is a higher risk if investment in shares is not well-diversified. | Since investment is in multiple funds of different sectors, the investment portfolio is well-diversified. |
| Liquidity | Investment in shares is highly liquid since they can be bought and sold anytime during market hours. | Mutual funds are less liquid as they take 1-3 days for redemption except in ETFs. |
| Minimum Investment | Depends on the price of the shares from individual companies. Generally, it requires a larger initial investment. | A SIP can be started with as low as ₹100 every month while a one-time investment can be as low as ₹500 making it a good option for beginner investors. |
| Cost of Investment | Includes brokerage fees, transaction costs, and potential Securities Transactions Tax (STT). | Includes expense ratio and exit load (if applicable). |
Mutual Funds vs Shares – Where Will You Invest?
Investors must determine their investment understanding, risk tolerance, and target financial outcomes before deciding between shares and MF.
Shares offer direct ownership in a company, allowing investors to have control over their investments. The prices of shares rise or fall depending on the business performance of the company and market movement, so investors need to keep regular track of their portfolio changes. Investors who are comfortable with higher volatility should consider investing in shares, as they typically offer substantial returns but come with increased risk.
When considering MF vs shares, mutual funds are suitable for investors who prefer professional management and diversification in their investment strategy. For beginners or those who prefer a more hands-off approach, mutual funds provide expert guidance and take care of stock selection and risk management.
As an investor, building wealth through Systematic Investment Plans (SIPs) in mutual funds is a strategic and disciplined approach. SIPs allow investors to make regular, automated contributions, reducing market timing risks and promoting consistent investment growth. This method offers a safer and more structured alternative to direct stock investments, as it reduces volatility and encourages long-term wealth accumulation.
With advancements in fintech and web trading platforms, the investment landscape is evolving rapidly. Understanding the differences between mutual funds and individual stocks is essential for making informed decisions. By maintaining a balanced portfolio that includes both mutual funds and shares, investors can optimise their returns while effectively managing risk.
Final Thoughts
Shares and mutual funds produce distinct advantages and challenges for investors. Shares are ideal for those with a strong understanding of market trends and who possess the technical knowledge to make informed predictions about future movements.
However, for investors seeking a diversified portfolio with professional management, mutual funds provide expert guidance and reduce individual risk.
Therefore, considering financial goals and willingness to take risks is imperative while investing in either option. If you are looking to invest in mutual funds and shares, Torus Digital offers an easy-to-navigate and seamless platform.
What are you waiting for? Use Torus Digital and start your journey towards achieving your financial goals!
