Difference between Shares and Mutual Funds

59 comments Written on November 29th, 2006 by
Categories: MutualFunds
Someone has asked, on a forum: What's the difference between shares and mutual funds?

Here's an introduction to mutual funds: http://theinvestorblog.blogspot.com/2006/06/introduction-to-mutual-funds.html

And here's my elevator explanation:

Shares: When companies look for money for their business, they can get it in two ways - either they borrow from a bank and pay interest ("debt") or they ask people like you and me to invest and give us shares ("equity"). A share is a part of a business.

Then let's say a friend named Sarath wants to buy a share of this business but the company has got all the money it needs. So Sarath asks us to sell our shares to him, at a higher value than we bought it. So he will own our share of the company, but he's willing to pay more because he thinks the company will do well. Now we make a profit and then Sarath perhaps sells it to someone else at even higher values etc. The company doesn't really get affected because it isn't seeing the money, but the share price goes up as the company starts doing better, and as more people begin to want the shares.

Why does the share price go up? The answer is: Perceived value. I may think the company is worth 1 crore, but someone else might think it's worth 2 crores. When my shares reach my valuation I sell, but someone else will think it's a good deal and buy.

To organise such buying and selling, there are commercial "stock exchanges". BSE and NSE are some of them, though there are a number of other, smaller exchanges in India. An exchange provides a common place for people to buy or sell shares, with sales happening on an auction basis - buyers bid for shares at a price they are willing to pay, and sellers "ask" for a price from buyers. Exchanges match these prices and share exchanges happen along with payments. "Brokers" facilitate these exchanges, and you pay them a fee as brokerage, part of which goes to the stock exchange as well.

Mutual funds: When a lot of shares are available on stock exchanges, you and me don't know which companies to invest in. But let us say a guy named Sandip Subherwal knows, and keeps track of the market daily. So we give him our money and he buys and sells stocks for us. This is a mutual fund - it's our money (mutual), and Sandip is a Fund Manager. There is a structure to this in India, so a fund manager is part of an "asset management company (AMC)". To protect Sandip from running away with our money, SEBI has some rules in place, and there are "trustees" for every fund. With this structure the AMC issues "units" to us for the money we have invested, and tells us how much our units are worth daily (NAV). We can then choose to exit by selling our units back to the AMC ("redemption").

Mutual funds are not just restricted to shares. They are mutual investments, therefore they can be anywhere. The common ones are equity (stocks and shares) and Debt. Debt markets are where companies borrow money, but they want to borrow huge sums of money that you and I don't have. Therefore, we pool in our money (mutual fund) and give the big whole lot to the company at an interest. Even the government borrows, but again, only large sums of money. Mutual funds can invest there too. Debt is traditionally "safer" than equity since there is a fixed valuation and good rating mechanisms to curb risk; and in the same vein, the profits (and losses) are usually much lesser than equity.

Mutual funds can also invest in other investment avenues, like Gold, Real Estate, Commodities and even in Windmills! Of course, in India only a few of these are available.

Shares are a part of a business, mutual funds are cumulative investment. I hope this helps.

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

59 comments “Difference between Shares and Mutual Funds”

>yeah it helped, me a total rookie in MF. got to know now, why there are so many catgories of MFs. thnx

>Very helpful. Nobody has explained me in such simple terms. Thanks

>Recently, I started to read your blogs, It’s really helped me a lot to understand basic terms about investments.

>Actually i am searching for the question, from last 3 days, Really now i got the answer, simplified answer, Thank you very much

>Are you a teacher? Because if you aren’t, you should become one. It takes a certain skill to explain in simple terms, and you do a great job at it. Thank you.

>very nicely explained…..thanx cleared a lot of doubts….

>Helpful.Job well done.Good for a start.Thanx mate.

>Your brief explanations are good and i gained some basic knowledge on Stocks and mutual funds.Thanks
-GnanasKeshav

>thanks…..
actually i m struggling from so many days to know the differences between mutual funds and shares……
This is really very helpfull…
Thanks a lot….

>it vas a gret information tat u provided.it helped me a lot..

>Good info, Helped a lot dear.. keet publishing such useful infos. Thank you Prashant

>thank you very much 4 this .
for many days i was searching for this difference.

>Ya,it’s really worth to read who is unkown of the terms share and mutual fund. This blog gives a basic idea of those terms.
Nice One…
Thanks

>It’s really helpful. I was looking for this diffrence from last five days even visted other websites but nobody has explained in such a simple manner………Thanx.

>You put into such simple words wat no one else could do to me until now…..thanks a ton…..

>thanx a ton. ur language was very simple and understandeable!

>This explanation is simply awesome…very helpful & simple but informative.

>hi..I have reffered many sites but i did not get a clear view of this topic till now..your explanation is very clear..thankyou for sharing your knowledge with us..

>Thanks a lot for your article.It is really very helpful for the people like us who are new in this field.

>dear ..! ur explanation really helped me a lot to understand the market…
thanx very much
sangram kumar y (orissa)

>thanks a ton mate. This was very helpful.

>Awesome dear friend, its very simple language you used to understand, I luved it.

Thanks a lot..

Ajay

>Dude its fantastic article. i learned so many things from this article.Excellent.

>thank u my frnd it realy helped me to recall all the old data thankss alot today is my interview so it will really helped me a lot thnak u soo much bye tk

>thanks dear,to help me understand these term in such a easy way.only once reading, i fully get knowlege about share and mutual fund.
Is there any other topic explained by you? plz give me link .
i want to know about insurnce 1st party ,2nd ,3rd etc.

>hey,thanks………….
it really helped me a lot.
sridevi,hyderabad

>neatly explained. great work. this helped shatter my tangles on the difference between mutual funds and shares! thnx

>Thanks its really helpful to me.
But my question is about returns of mutual funds and direct investment in shares. Is mutual funds growth never be less than 20%? AND is mutual fund's investment haven't any loss?
Please reply me on:

technosml@gmail.com

MONU, SHMILA

>thank you for explaining the diff between mutual funds and shares…. this could be so helpful for beginners like Me in trade marketting

>Thank you very much for your simplest way of explanation. Before reading this i don't know anything but it has given me an idea about this

>Thanks ! But, Let us know If I am planning to sell shares , should i wait for someone or we can sell in fraction of seconds !

>Wait for someone? :) Not in this age! Sell when you want – as long as your shares are with you you can sell as many as you like.

>Thank you for great information

>Thanks a lot..i, being working in a financial software company n being a fresher, was struggling from a week..u really helped me..

>thanks a lot…. its really informative

>thanks…it was really helpful.

>thanks…its easy to understand

>Thats really great about the simple explanation, keep on writing

>I was confused about these mutual funds and shares
Now i got cleared
thanks you

>thanku alot of information.anitha

>Quite Simple and Practical.
Good work.

>I never thought that someone can describe it so lightly. Thank you so much for this informative information :)

>Thanx for such a helpful information…..

Thanks for giving us a very good difference alongwith examples, please tell me which mutual fund is better for first time investment

simple and best explanation.. thanks ..

I didnt know how it makes difference between mutual fund and shares. Very brief and good explanation. Thanks..

Thank you for the crisp explanation.

nicely explained……thanks alot..

Hey dude, very nice simple attractive n effective blog. thanx

thanks a lot… good explanation… gained some knowledge….

I am satisfied with those answers.
But I want to know in details about the above i.e.
details of NAV etc.
who is more profitable equity of mutual fund ? and why ?

please provide me the answers.

even a lay man can understand!

Very well explained thanks.

Great post sir, so mutual fund may be invested in any number of shares done by AMC with our money and investing in shares is directly we trading with a company.
Thank you so much for posting the concept in the simplest manner!

very nicely explained

it clears all the doubts…thank u so much

Very simple and clear explanation. it is really very helpful for beginners like me. thanks and keep rocking

Great Article In simple terms.

give me a good idea between shares and MF, thaks,the writer a lot…..
wish u a long live……………