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.

Shares signify units of shareholders’ ownership in an organisation. They are the financial instruments enabling an entity to raise capital and attract investors to collect funds for their daily operations. Precisely, shares are the unit of proportional ownership in a company's capital. Those who purchase shares are called shareholders of a company since they own a certain percentage of ownership of an issuing company in proportion to the number of shares purchased.

Mutual funds refer to the substantial pool of money a professional fund manager keeps. They allocate fund assets and try to generate income or capital gains for fund investors. Mutual funds are, basically, a kind of investment in which investors must pool their money so that they can invest them in bonds, stock, and other forms of securities. In general, pooled money means combining your funds with funds from other persons for shared use.

There are mainly two types of shares that you can buy, as discussed below:

1. Equity Shares

Equity 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.

Mentioned below are the types of mutual funds available in the market:

1. Open-Ended Funds

In 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 Funds

Close-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 Funds

Like 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.

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.