Living in a time when prices of commodities tend to go higher every now and then, having an additional source of income has become almost like a necessity to meet the increased cost of living. This has made investments a quintessential part of people’s lives. However, there are so many varied investment options available in today’s market that it might confuse people about which investment tool should be ideal for them. Shares and stock market mutual funds are two of such investment options in which people are divulging their income and savings increasingly, in the expectation of earning profitable returns. These investment instruments are interlinked to an extent and thus, you need to have a clear concept of both to understand which can be a better option for you.

What are shares and mutual funds? 

Shares are equal units of a company’s total capital held by individual investors. Companies promise to distribute their profits among shareholders in the form of dividends. Mutual funds, on the other hand, are funds raised by fund management companies from individual investors to invest in shares, bonds and other securities available in the National Stock Exchange(NSE). 

The main difference between shares and mutual funds is that in shares, you own a unit of a company directly while in mutual funds, you invest through an expert fund manager. Shares is one type of securities that investors can invest in while mutual funds invest in not only shares but also many other securities. With the best mutual funds in India, you can diversify your portfolio with a small investment by investing in a variety of securities. However, for investing in shares, you would need a decently higher amount and will be difficult to achieve diversification as you would typically invest in equities only.

Factors of comparison between shares and mutual funds

Shares and mutual funds are two popular investment tools in today’s world. However, both these investments can be tricky if not done with prior knowledge. If you need to understand which of these two investment options is better for directing your savings to, then it will be wiser to compare the various aspects and consequences of investing in shares and in mutual funds.

Required expertise and effort

When you invest in shares directly, you would need to understand the stock market thoroughly and learn how it works and how you need to manage your shares accordingly. It necessitates investing a good amount of time in researching about the stock market, price of shares, market fluctuations, etc. You need to sell or buy shares based on your understanding and predictions. 

In mutual funds, you can be a passive investor and let your broker do the research, sale and purchase. As the brokers are professional fund managers who have the required expertise for trading efficiently in the stock market, you can rely on them and won’t need to put much time and effort after investing your money. LKP Securities is one of the best new mutual funds in India who provides transaction services as well as advisory services regarding fund management and thus, can be relied on with your fund.

Return on investment

When you invest in shares of a company, you become a direct owner of a unit of the company. Thus, when that company earns a handsome profit, you get a share of it directly. There is no middleman involved. 

In stock market mutual funds or any other mutual funds, besides investing capital, you are required to pay certain charges to the brokerage firm for the services they provide. The broker invests the money collected from all investors and distributes among them a part of what the broker has earned. Due to the involvement of a middleman in mutual fund investment, the return on investment is likely to be higher in shares than in mutual funds.

Risk factor

Though the return on investment can be higher in shares, it also comes with a huge risk factor. If a company whose shares you own runs in the loss, you might end up earning no gain or even losing your invested capital. Shares are, thus, highly influenced by market fluctuations. 

In mutual funds, you can alleviate this risk by diversifying your portfolio through investing in a variety of securities. In shares, it will be difficult to diversify the investment as then you have to spend a lot of money on purchasing shares of varied companies. So, mutual funds are a comparatively safer investment option. Having said that, mutual funds also bear the risk and thus, it is important to invest in best mutual funds in India to increase the chances of earning good returns.

Investment cost

For investing in shares, you just need to pay the transaction charges for purchasing a share. However, if you invest in mutual funds, you will need to pay charges for the services offered by the broker. Such charges will include Demat account opening charge, brokerage fee, Annual Maintenance Charges, transaction tax, etc. On the other hand, buying shares of a company directly is likely to be costlier than investing in mutual funds. Among the best mutual funds to invest in India, LKP Securities provides a free Demat trading account with no AMC charges and is thus, quite a good option to start investing at low cost.

Involved tax

As per the Section 111A of the Income Tax Act, short-term capital gains are to be taxed at 15%. Under Section 112(A), long-term capital gains beyond Rs. 1 lakh is taxable at 10%. Both shares and equity-oriented mutual funds are taxed at this rate. However, the Equity Linked Savings Scheme(ELSS) is a mutual fund that comes with a tax benefit. You can claim a tax deduction on it under Section 80C of IT Act. So, the tax implications on mutual funds depend on what kind of securities you are investing in.

Systematic investment

Mutual funds provide the benefit of investing through Systematic Investment Plan (SIP). In this, a predetermined amount will be deducted from your account every month and will be invested in your preferred mutual fund. Thus, it is an automated system and you won’t need to conduct the investments every time. 

In shares, however, you have to invest each time personally and it can’t be automated.  Among the best new mutual funds in India, LKP securities offer Seven Picks Investment Plan which is a proven plan for earning attractive returns by investing in the 7 stocks recommended on a monthly basis.

Minimum investment sum

Due to the SIP system, an investor in mutual funds can start investing with a very low amount (Rs. 100) and can even diversify the portfolio through such small periodic investments. On the other hand, if you want to reduce the risk factor and diversify your portfolio by buying multiple shares directly, then you would need a considerably higher amount to start investing.