Shares or Mutual Funds – Which one is better for Investment?

Bengali: এই ব্লগটি এখানে বাংলায় পড়ুন।

The growth of the stock market over the years has led to the creation of various types of investment instruments. These instruments are created with the sole purpose of catering to various combinations of risk appetite and financial goals.

While shares are the most traditional way of investing in the capital market, mutual funds are a newer style of investment.

Investing in shares or mutual funds means getting ownership in that company. But you are restricted to that particular asset class only, which means Equity. So you are subject to high return but high-risk scenarios.

In the case of mutual funds, you also invest in the company’s shares, but indirectly, you also get to invest in other asset classes. A mutual fund is a pool of assets that gives you a diversified portfolio, which is managed by expert fund managers.

For understanding the mutual fund part, we will focus on  Exchange Traded Funds (which are a type of mutual fund) which tracks an underlying factor like a Stock Market Index.

Investment in both these products differs heavily, and in this article, we will compare Shares and ETFs to see the differences in what they offer to individual investors.

What are the differences between Shares and ETFs?

1. Definition

A stock is a product that represents ownership in a single company. On the other hand, an ETF is a type of mutual fund that replicates the performance of an underlying factor.

2. Value

The value of stocks depends on its supply and demand in the stock exchange, while the value of an ETF completely relies on the performance of the factor it is replicating.

3. Investing Style

Stocks involve active investing; investors have to do hands-on research to make efficient investments. However, ETFs are an element of passive investing; they do not involve active research and trading.

4. Rights to investors

Stocks provide ownership and voting rights to their holders, whereas an ETF doesn’t provide any ownership rights over the company.

5. Types

Stocks are of multiple types – preference shares, redeemable shares, ordinary shares, etc. On the other hand, an ETF can track multiple elements like commodities, sectors, stock market indices.

Apart from the above points, the risks-and-return is a difference that makes both investment products distinct.

Company stocks can enjoy inflation-beating returns as they focus on the company’s performance. Some stocks can also outperform their own industry or the entire stock market. They also carry a higher level of risk.

The higher the market value, the higher the share’s risk and returns. Returns from shares often come in the form of bonus shares and dividends.

On the other hand, an ETF is created to deliver a performance mirrored by its underlying factor. This factor can be a commodity, currency, or even an entire sector. Therefore, its returns and risks mostly depend on the underlier’s performance.

When it comes to risks, most ETFs are safer investments. However, some can be as risky as stocks. For example, an ETF in the oil industry is considered risky. This is because the oil industry itself is very volatile, and its performance depends on multiple macroeconomic and uncontrollable factors.

Should we invest in Shares or Mutual Funds?

There is no right answer to this question.

While stocks have always been popular, more people are turning towards ETFs to achieve their goals.

For example, the effects of the Coronavirus pandemic on the stock market have brought about a major change.

Bloomberg reports that in January 2020 alone, Indians invested more in gold ETFs than they had invested in the last seven years. This shows that investors are willing to try other products as the market situation changes.

Therefore, when choosing between shares or mutual funds, your answer should depend on–

• Your risk-taking capability;
• The returns you require; and
• Your investment objectives.

Before you choose any investment product, make sure to do your research.

You can take the help of StockEdge Web to learn in detail about the various mutual fund classes available, and make an informed decision.

Also, weigh the benefits and drawbacks of each fund and stock for your portfolio and investment goals before you choose them.

So which product have you recently invested in – Shares or Mutual Funds and Why?

Conclusion

Shares are a traditional method of investing, whereas mutual funds and ETFs are relatively new. Both shares or mutual funds offer various benefits to investors under different market situations. An informed investor should be mindful of their risk-return profile and financial goals before making a choice between shares or mutual funds.