When an individual is deciding on an investment instrument, among the myriad of options available in the market, two of the most sought after options are share market investments and mutual funds investment. While both the options have their benefits, deciding between the two would depend on three factors.
- The first factor is the risk-reward ratio. The individual must analyze their risk profile and understand how much risk they can tolerate versus their investment return goal. If the individual is seeking higher returns, then they'll have to accept higher risks.
- The second factor is time. The choice of investment will depend on the amount of time an individual is willing to spend on their investments. This time involves the amount of time the individual will spend learning about their financial statements or their investments' fund prospectus.
- The third factor is the different fees and expenses involved that the individual is willing to handle. It will include the tax implications as well.
Individuals who are confused between mutual funds or share market investments must keep these factors in mind when deciding on investment choices.
In a share market investment, the individual owns a share of the company. As a partial owner, they will earn funds in two ways. The first income is a dividend payment. Shares that offer dividends pay out a percentage of the profits to shareholders quarterly or annually. It provides a steady flow of taxable income throughout the period the individual owns the stock.
The second way individuals earn through shares is by selling them for a profit. If they purchase the stock at a lower price and if the company does exceptionally well, their share's price will go up.
Therefore, the shareholder can sell their share and pocket the profit from the company's success. It is a type of capital gain.
In mutual funds, the funds from different investors are pooled together to purchase stocks in bulk. When an individual owns a mutual fund share, they are entitled to get a proportional share in the underlying basket of securities. They are quite beneficial for building wealth gradually over the long term.