What is the difference between an initial public offering (IPOs) and mutual funds?
In simple terms IPO is an offer to buy a company’s stock. There are two methods to do this: you can do so directly when the company unveils the IPO by issuing new shares and you apply for it. After the shares are released in the market and if you buy after that then it is no more an IPO, in such a case you move from the primary market to secondary market. In the second situation when you are buying shares, another investor is selling them to you, not the company, and therefore, it is called a secondary market transaction.
At the starting point the face value of one share can be Rs 10. In the secondary market when you buy shares the price is generally fixed based on its demand and supply.
A mutual fund, on the other hand is a portfolio. When you invest with a mutual fund then the fund buys many shares, if it’s an equity fund. It buys many bonds if it’s a debt fund. With less effort you get a professional management and a diversified set of stocks. Investing through the funds you don’t need to research different stocks or decide when to invest. Rather there is a professional manager who is doing it for you. If you want to trade stocks on your own, then you will have to take all the decisions on your own.
I have an investment in an Aviva ULIP plan. I have invested Rs 25,000 each in my daughter’s and wife’s name. I have not paid the second installment, this is for five years. Now I am being advised that rather I should go for a mutual fund as it would be far better as my returns would be higher. What is your opinion?
Broadly put, ULIP is not a good way of investing. It is a combination of investment and insurance. And how much of your money is being put to investment and how much is put to use in insurance is a matter of policy document. Personal suggestion would be to move your money out of it. If you pull out now then as of now you will be losing only a residual value of your total investment. You must consult an insurance advisor, the person who sold you this plan, or at least read your policy document as that would help you arrive at a decision much better.