Dhirendra Kumar highlights the difference between investing in equity mutual funds and shares
What is the difference between the returns generated by investing in mutual funds and shares? Also, what is the difference between their tax treatments?
I understand that you want to know the difference between equity mutual funds and shares. There isn't much difference between them.
While investing in shares, you choose companies and invest in them and all the profits comes to you. Directly owning a share also has its pros and cons. One has to put in one's own research, diversification ability and temperament to use. On the other hand, by investing a small amount in a fund, one gets shares of many companies at once. As a result, one gets instant diversification, as well as professional management of his/her money. However, for all these, funds charge a fee, which reduces one's returns by about one per cent in the case of direct plans and by about one-and-a-half to two per cent in the case of regular plans.
The taxation treatment for both shares and equity mutual funds is the same. Holding a share for less than a year exposes one's investments to 15 per cent short-term capital-gain tax, while holding it for more than a year attracts 10 per cent long-term capital gain tax, beyond a gain of Rs one lakh. The same thing is applicable to equity mutual funds. However, mutual funds provide some benefits here. The activity of selling shares by the fund manager is not liable for capital gains tax. You are sheltered from paying any capital gains tax until you sell the units of your mutual fund.