So many different arenas for investment have now grown that it has become increasingly confusing to differentiate between similar looking investment options. Right at the top of this list is the popular mutual fund investment, and the niche hedge fund investment. To understand the main differences between these two types of investment, it is important to know first what they are and that they have a few similarities as well.
Mutual funds are pooled funds from different sources that are invested in various financial securities like stocks and bonds. These funds usually have very low risk and a low initial investment limit. Because of their low-risk nature, their returns are not very aggressive. Anyone from the general public can invest in them.
Hedge funds are also pooled funds, but their investors are a small group of high stakes investors from the affluent strata of society that are willing to take major risks in order to gain more than normal returns. Only high net worth individuals and institutions like banks and insurance companies can invest in hedge funds.
Both mutual funds and hedge funds are a type of investment where funds from different investors are pooled together and invested in a portfolio consisting of different securities like equity and debt.
Both hedge funds and mutual funds are invested in a diverse portfolio that includes stocks, bonds, and other securities.
The last similarity that both hedge funds and mutual funds share is that they both are professionally managed by experienced fund managers who allocate the funds according to market movement.
Now that we know how hedge funds and mutual funds are similar, understanding their key differences is easier.
Differences between hedge funds and mutual funds are given below while the biggest difference is that Mutual funds are highly accessible while hedge funds are not.
Mutual funds can easily be used as investment options by the general public because the minimum invested amount can be as low as Rs. 500. In a stark contrast, not everyone can invest in hedge funds because the initial investment required is quite high. Also, there are only a specific group of people like banks, insurance companies or individuals with high net worth that are allowed to invest in hedge funds.
Both hedge funds and mutual funds are professionally managed and both of them incur management expenses that are deducted from the investment. However, the expenses for hedge funds are much higher than mutual funds. This is mainly because hedge fund management is more complicated and a more aggressive and shrewd approach is required for hedge funds.
Mutual funds give excellent returns in a bullish market while the returns are below average in a bearish market. With hedge funds, however, the objective is to get good and steady returns regardless of how the market is performing. The downside of this is that even in a bullish market where mutual funds are performing exceedingly well, hedge funds will still give out steady but average numbers.
Mutual fund managers do not have a personal interest in the performance of the fund they’re managing. However, hedge fund managers are required to invest substantially in hedge funds themselves so that they can be more cautious and make the best decisions because their own investment is at stake.
Unlike mutual funds, which are strictly regulated by the Security and Exchange Board of India (SEBI), hedge funds are not regulated to that extent.
Mutual funds have to regularly publish annual reports and balance sheets as well as quarterly asset performance that are available to the public. On the other hand, hedge funds are very private, and their performance reports are only available to the investors themselves.
As far as accessibility is concerned for the common man who wishes to participate in his or her own share of investment, then mutual funds is the way forward. With their low minimum investment amount and ease of use, it is one of the most popular forms of investment. However, if your goal is to beat inflation and you happen to be a high net worth individual or company, and you’re willing to take more risks by putting forward a high initial investment amount, then a hedge fund might be more suitable for you.