These two can be confusing to non-investors. People who have already invested more or less in these sectors would know about it.
It is imperative to have a clear picture of both of these sectors before you invest in any of them. It’s not only about different investment schemes but also how your invested amount will be diversified.
- Hedge funds are investment vehicles that employ sophisticated strategies, such as leverage and short-selling, to achieve high returns.
- Mutual funds pools are investor funds to invest in a diversified portfolio of securities. They are offering more conservative and transparent investment options.
- Hedge funds cater to high net-worth individuals and institutions, whereas mutual funds are accessible to a broader range of investors.
Hedge Fund vs Mutual Fund
The difference between a Hedge fund and a Mutual fund is that mutual funds will provide you with a minimum return rate known as the risk-free rate. On the other hand, the hedge fund will try to maximize your return on your investment.
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A hedge fund is an investment designed to give you a decent return. It comes with lower risk and is mainly invested in liquid assets for a better outcome.
Mutual funds are predominantly known as safe investments for their risk management procedure and better diversification. In this case, your invested amount will be diversified into stocks, bonds, the money market, etc.
There are different types of mutual funds, and it is available in small investments as well.
|Parameter of Comparison||Hedge fund||Mutual fund|
|Investment||In a hedge fund, only a few wealthy people can invest to maximize their profits because the minimum starting investment amount for this is pretty high.||A mutual fund is for people who can invest in small or medium amounts. Most people are qualified to spend on this as the minimum investment is very low.|
|Profit margin||The profit margin in hedge funds is much higher than in mutual funds.||In this case, the investment is kept to a minimum amount, which is why the profit-to-investment ratio also reduces because of its lower risk.|
|Ownership||There can only be very few wealthy owners regarding hedge funds.||Millions of people could invest in mutual funds and can become an owner.|
|Management||They invest worldwide to utilize the investment and can return maximised profits. Investing in global assets, such as art, real estate, etc., is allowed.||Managed in a way to keep it risk-free so it could provide a fixed return. It does not invest in derivatives or any distressed assets.|
|Transparency||Hedge funds only disclose the information to their investors.||Mutual funds are transparent and must publish their annual performance report publicly for their investors.|
What is Hedge Fund?
Hedge funds are for exclusive people who can invest a more significant amount. That investment will be diversified worldwide to maximize the profit it.
The main goal of hedge funds is to generate a higher return by managing the procedure aggressively.
These processes take part in different investment strategies. Every investor needs to keep their funds for at least one year to distribute the investment evenly in various aspects for better opportunities.
Since you can only withdraw quarterly or bi-annually, you must consider some critical points regarding Hedge funds –
- This investment has been growing exceptionally for the last twenty years and is proven to be more profitable in the upcoming days.
- The risk of hedge funds is higher than any other, like the profit percentage.
- Remember that any profit earned through these hedge funds will be counted as your income, which means it will be taxable.
- The fees for asset management and overall are higher than any other investment sector. Hedge funds charge 2% for asset management and 20% for overall fees.
The main characteristic of hedge funds is that they invest using borrowed money. They will make a broader investment in almost everything, including – lands, real estate, currencies, etc.
In short, hedge funds are high-risk investments with higher returns than mutual funds. Before investing, you must study asset management and know what strategy works for you.
What is Mutual Fund?
Mutual funds are an investment scheme that is recommended for the majority of people. The minimum investment is meagre, and it is risk-free.
Mutual funds are regulated by SEBI and must follow all of its instructions.
One of the advantages of mutual funds is that they provide opportunities for small to big investors to diversify their portfolios. One could not expand so vastly on their own as mutual funds could.
Since it is much safer than hedge funds, most people choose this path to invest their hard-earned money. There are some key characteristics of mutual funds that you should know –
- Three types of mutual funds exist debt, equity, and hybrid.
- You can invest and withdraw your mutual funds on any business day at Net Asset Value, called Open-ended mutual funds.
- You can invest for a long time with a pre-defined maturity date known as Close-ended mutual funds.
- The main objective of mutual funds is to diversify your investment and get a risk-free return.
Depending on your need, you could invest in mutual funds for the short, medium, or long term. This means your investment could last from 18 months to 5 years.
Main Differences Between Hedge Funds and Mutual Funds
- SEBI strictly regulates mutual funds, but it is not mandatory for hedge funds.
- The withdrawal process of mutual funds is more straightforward for short-term strategies, whereas, in the case of hedge funds, the investment is locked for a specific time, which is why withdrawals are not possible.
- Mutual funds come with risk-free policies, whereas hedge funds are hazardous to invest in.
- Hedge funds are only available for investors of high net worth. On the other hand, anyone could invest in mutual funds.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.