As an investor, you have a choice of investing in shares or equity mutual funds. When you invest in shares, you tend to invest directly, and you are a shareholder. In the case of equity mutual funds, you buy units of the fund, which in turn invests the amount in equity shares.
In short, you can buy shares directly in your name or you can buy equity mutual fund units, which in turn buys shares from the market. Shares are initially issued by a company, to get themselves listed, while mutual fund units are issued by mutual funds to invest in equities, if they are mandated to do so.
Why go through mutual funds?
Fund managers of equity mutual funds have the expertise, which is why many investors tend to also buy equity mutual fund units. Typically, when you buy shares there is a lot of fundamental analysis that is involved.
Equity fund managers have a dedicated team of equity research analysts, who arrive at reasonable valuations for stocks with various ratios like price to earnings ratio, price to book value ratio and other key metrics. So, they can make a better stock pick, though not always. Individuals who have the expertise and there are millions of them, tend to invest directly.
If you are confident, you can go ahead and invest directly, if you have the knowledge.
Take a look at the difference between equity mutual funds and shares.
|Shares||Mutual Fund Units|
|Issuer||Issued by companies||Issued by mutual funds|
|Purpose of issuance||To get the shares listed||To invest in shares or as mandated|
|Purchase||Can be purchased from the exchanges||Can be purchased from the mutual fund house|
|Tax implications||Attracts long term and short term capital gains on sale.||Mutual Fund too attract long term and short term capital gains on sale.|
Investors today are increasingly seeking to invest in mutual fund units. Over the longer term, mutual funds have given good returns and so have shares. If you lack the expertise and wish to invest in equities, you can take a look at equity mutual funds. They have given superior returns over the longer term and so have good quality stocks.
About the author
Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. Sunil's areas of interest include commodities, equities, mutual funds, tax planning and debt instruments.