When it comes to investment, people get a lot of confusion. It might be about choosing the correct product, choosing the right platform, or choosing the right strategy. Among all, one of the most common questions is about mutual funds or equities for new investors. In the world of investments, mutual funds and equities have some fundamental differences. Starting from the investment style and cash flow, there are some significant differences between these two products. This blog explains to you the difference between mutual funds and equities and will help you choose the right option best for you.
What are mutual funds?
Mutual funds offer a diversified portfolio with securities and equities from different sectors and different risks. Mutual funds usually pool money from investors and invest in various securities. These funds are managed by professional fund managers. Hence, a management fee is levied on the investors of the mutual funds. Mutual funds can be of low risk, medium risk, and high risk based on the securities it is invested in. You can select mutual funds based on your goals and objectives.
What are equities?
Equities represent the shares in a company. You get exposed to equities through the stock market. When you buy shares you buy partial ownership of the company. Hence, you are eligible to get a share of the profits the company makes. Investors, usually invest in equities due to the potential for high returns. Equities also possess a certain level of risk. However, equities are also one of the most sought-after investment instruments
Both mutual funds and equities do not have any fixed income. The returns are completely based on the market performance. However, there are some differences between the two options.
1. Returns and risks:
Both mutual funds and equities performance is based on market trends. Even though mutual funds have equities, the asset classes are carefully selected to avoid maximum risks to the investors. Any negative impact on one stock on the mutual fund will be compensated by the profit in another fund. On the other hand, equities possess risk based on the stock you invest in. In both options, the risk involved is based on the funds and equities you choose to invest. Similarly, the returns are also not guaranteed in both equities and mutual funds.
Mutual funds are funds traditionally managed by a fund manager. The fund manager chooses the funds and strategies to drive the fund to profit. Therefore, in a mutual fund, your portfolio is managed by an experienced professional. You might not have adequate knowledge about the market. But still, your investment will be professionally managed. In the case of equities, you should manage your investments. You are completely responsible for the choosing of the equities. Moreover, you should be aware of market trends and periodically rearrange your portfolio to avoid negative returns.
Mutual funds comprise diverse assets. The fund manager diversifies the investment with stocks and securities from different asset classes and sectors. This diversification is the key to achieving profits in the market. You can choose the mutual fund based on the diversity of the stocks offered in the fund. Therefore, mutual funds are highly diversified. Whereas, in equity investment, you have to choose the equities based on your risk potential. You can invest in different sectors and asset classes as per your liking. In equities, you have the liberty to choose the companies you deem fit for you. Hence, this is one of the major differences between equity and mutual funds.
4. Investment style:
Mutual fund investments are two types – Lump sum and SIPs. In lumpsum, you can invest a big sum of money in a fund and wait for a certain time until you gain profits. In SIPs, you can invest any amount of money regularly (Daily, weekly, monthly, etc) in more than one fund to build your portfolio. This method makes it more convenient to invest in. In the case of equity, you can invest whenever you want based on the stock price. You can decide the stocks and number of shares solely based on your research. Hence, this is another distinction between mutual funds and equities.
What suits you?
There is not one solution for all in the investment world. What works for you might not work for your friend. Therefore, it is important to analyze your goals and budget before deciding on the product of investment. As a beginner, this might seem to be a herculean task. You can seek help from experienced professionals who can guide you through every step of your investment journey. To start an investment and have a committed habit of investing can be exhausting. But starting with a minimum of Rs.1000 a month can help you build a secured future for yourself and your family. Don’t wait for the perfect time. Start investing and everything will follow.