When you build your portfolio, regardless of your investment goals, there are two main factors to consider:
- The time (in years) that you will be expecting the need for said money, also known as the time horizon
- Your risk tolerance, i.e. your attitude and capacity towards taking risk
If you’re looking for relatively higher returns, two of the most popular options you have are shares and mutual funds.
Here is all you need to know about the two instruments and how you can choose the right one.
How it works
Companies issue shares (or stocks) to raise funds through the means of an Initial Public Offerings (IPO), after which the company gets listed on a stock exchange. The value of these stocks fluctuates as per the performance of the company and the market overall. If the company grows, the shares also grow in value. However, if the company doesn’t perform well, the value of these stocks also plummets. To buy and sell shares, you need a trading or demat account.
Mutual funds, on the other hand, are investment vehicles that pool in money from different investors. The fund house appoints a professional investor who invests in various asset classes – bonds, shares, real estate. The returns of the investment are distributed among the investors, in proportion to their initial investment in the fund. You do not need a demat or trading account to invest in .
Mutual Funds vs Shares
Shares tend to have a higher risk factor as compared to mutual funds. Mutual fund investments are spread across a variety of shares or other securities. This brings about portfolio diversification and safeguards your investment from the volatility of the market.
- Research for investment
Trades on mutual funds are made by professional investors, who make informed decisions. For this, you pay an annual management fee to the fund house. On the other hand, you as an investor will have to do extensive amounts of research before investing in the share market, especially if you are a novice investor.
When investing in mutual funds, you only get a portion of the returns based on how the portfolio performs. Investing in stocks makes you a shareholder in the company, which means that you earn dividends based on the company’s performance.
- Time horizon
While investing in shares, you earn profits by employing the right buy, hold, and sell strategies. In order to make your investment profitable in funds, you must ideally hold onto your investment for long periods of time.
- Size of investment
Both require different amounts of capital for investing. Investing in stocks requires large amounts of capital as share sales happen in lots. On the other hand, investing in online can be done with an amount as low as Rs. 500. You can also follow the SIP approach of investing in mutual funds.
Get a proper understanding of the differences in shares vs mutual funds before investing in the market.