What is the difference between shares and mutual funds in terms of risk and profits?
We have some mutual funds that invest in equity, some invest in bonds and some invest in a combination of both. If you compare investing in shares with investing in funds, then the comparison will be with an equity mutual fund.
When you buy a share, you buy shares of one or two companies. When you buy an equity mutual fund, you get instant diversification, as the fund invests in 15-20-30 or even more types of shares. So, in this sense, your money is put for better use. Also, you can start investing with small amounts. This diversification brings stability and steadiness to your investments, thereby moderating your risks.
Further, mutual funds provide professional management of your money, as mutual funds are managed by professional fund managers. Convenience is another benefit of investing through mutual funds over stock investing. When investing in a fund, you can easily choose one and start investing in it. But buying shares requires thinking about the kind of shares, the number of shares, time to buy and sell it, etc. Although the gain potential is more in the case of shares, that is only if all your selected companies turn out to be good. But that depends on the choice and time of your stock investment. And in case the choice of the company turns out to be bad, the gain potential can completely go for a toss. A mutual fund investor is broadly protected from such concentration risks.
Having said that, a fund levies some charges - about 1-1.5 per cent - which reduce investors' returns and are borne by investors. As one invests in shares on one's own, no such expenses need to be borne by an investor buying shares.