Invest in Shares or Mutual Funds

I got in my Inbox a very interesting question and it stated

I am mainly into ____ profession and have some extra cash and would like to invest in shares. Should I invest in Mutual Fund or in Shares and which one would give me more return and would be less risky?.

First this is not one question but three in all.

1. Should I invest in Mutual Fund or in Shares?
2. How Mutual Fund differs from Shares?
3. Is Mutual Fund less riskier than Shares?

I assume the person was asking about the Equity linked mutual fund then also this one is not very odd question. I have seen many people still have confusion and ask about this and so I thought I would clarify it. So lets analyze and answer each of them.

1. Should you invest in Mutual Fund or in Shares?

There is as such no general rule as to whether you should invest in Mutual Funds or shares but its totally dependent on your investment objective. If you can do good research and dedicate time to find good companies to invest, you should invest in shares but if you cannot do that you should follow your fund manager and invest in Mutual Fund but the reverse is not true.

2. How Mutual Fund differs from Shares?

The major difference between shares and mutual fund is when you purchase shares of any particular company you only invest in one company in one possible sector. But when you buy units of mutual fund you effectively buy shares of many such companies in very less proportionate. So if there is some sudden news following any company or sector you are protected against the sharp movement.

3. Is Mutual Fund less riskier than Shares?

If you read all over internet and see the advertisements in TV you would tend to believe that mutual funds are less riskier but the fact is mutual fund are as risky as shares because they eventually invest in shares of companies. The only benefit you can get is what I mentioned above i.e. protection against sharp movements.

There are several companies which tend to go up and down by 40% in a day or week but there is hardly any fund which moves that much in such a small period of time.