Difference between Shares and Mutual Funds

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Someone has asked, on a forum: What’s the difference between shares and mutual funds?

Here’s an introduction to mutual funds:
http://capitalmind.in/2006/06/introduction-to-mutual-funds/

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.

Open Demat Account at AngelBroking.co
Open Demat Account at AngelBroking.co
Open Demat Account at AngelBroking.co
Open Demat Account at AngelBroking.co

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.

Some More Concepts for You:

When does a Dividend Reflect in Share Prices? What are Stock Splits? De-mergers?

Mutual Funds Engage in Dividend Stripping: What Does that Really Mean?

Demystifying: Inflation – How do Individual Items Contribute to It?

Financial Advice for Market Beginners: Cutting Through all the Jazz

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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59 COMMENTS

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

  2. >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.

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

  4. >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….

  5. >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

  6. >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.

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

  8. >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..

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

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

    Thanks a lot..

    Ajay

  11. >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

  12. >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.

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

  14. >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

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

  16. >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

  17. >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 !

  18. >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.

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

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

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

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

  23. 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.

  24. 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!

Comments are closed.