In today’s world of investment, there are various options which confuses investors about which option is suitable for them. A few of such options include mutual funds and hedge funds, each offering different risk levels, strategies, and returns, making it essential for investors to understand their goals clearly.
In today’s blog post, we will give you an overview of mutual funds and hedge funds, along with their differences and in the end, will tell you which one is suitable for you.
What are Mutual Funds?
A Mutual Fund is an investment product which is offered by Asset management companies. In which the company collects funds from investors and appoints a fund manager to manage such funds by investing them in different assets, such as stocks, bonds, etc.
Features of Mutual Funds
The key features of a mutual fund are as follows:
- Professionally Managed Funds: The funds invested by the investors are managed by professional fund managers, who have vast experience in fund management.
- Diversified Portfolio: The fund is invested by the fund manager in different asset classes such as bonds, equity, gold, etc., which reduces overall risk.
- Low-cost: The fees charged by the asset management company are very low compared to other investment options.
- Affordable: One can start their investment in mutual funds by investing a minimum of INR 100 – 500.
What are Hedge Funds?
A Hedge Fund is managed privately by the fund manager that pools money from various HNI investors, including retail and institutional investors. They use aggressive strategies such as short-selling, derivatives, etc., to generate returns. The hedge funds have limited regulations, unlike mutual funds.
Features of Hedge Funds
The key features of hedge funds are as follows:
- Aggressive Investment Strategy: Hedge funds employ high-risk, aggressive investment strategies, including short-selling, leverage, and derivatives.
- HNI Investors: Retail and institutional investors who have high net worth can consider investing in hedge funds.
- Performance Fees: Hedge funds generally charge performance-based fees, in addition to a fixed fee structure. However, the type of fees depends on the asset management company.
Difference Between Mutual Funds and Hedge Funds
The key differences between mutual funds and hedge funds are as follows:
| Particular | Mutual Fund | Hedge Fund |
|---|---|---|
| Investor | Mutual funds are allowed for all kinds of investors, especially for retail investors. | Hedge funds are allowed for high-net-worth individuals and institutional investors. |
| Returns | These funds aim to outperform the benchmark or give returns similar to the benchmark. | Hedge funds aim to give a positive return in every market condition. |
| Strategies | Fund managers in mutual funds do not use any complex strategies. | Complex strategies such as derivatives, short-selling, etc., are used by the fund manager. |
| Regulated | Mutual funds are strictly regulated by the Securities and Exchange Board of India. | They are comparatively less regulated than mutual funds. |
| Transparency | Mutual funds offer high transparency with respect to portfolio disclosure, etc. | Hedge funds offer comparatively low transparency compared to mutual funds. |
| Fees | It charges low fees for managing funds. | Hedge funds charge higher fees when compared to mutual funds. |
| Minimum Investment | The minimum investment amount in mutual funds starts from INR 100. | In the case of hedge funds, the minimum investment amount is 1 crore. |
Mutual Fund vs Hedge Fund – Which is better?
The decision between the mutual fund and the hedge fund will depend on the risk profile of the investor and their investment objective. They can invest in mutual funds in case they want to invest in a low-cost investment option with moderate risk and return. However, if you want to get a higher return and are willing to take a higher risk, then you can choose to invest in hedge funds; however, they charge higher fees than mutual funds.
Read Also: SIP in Stocks vs SIP in Mutual funds?
Conclusion
On a concluding note, both mutual funds and hedge funds are suitable for different classes of investors. If you have a high net worth and are comfortable with taking high risk, then a hedge fund is a suitable investment option for you, as we know that with higher risk comes higher returns; therefore, hedge funds offer higher returns. Whereas, on the other hand, mutual funds are suitable for investors looking for investment products with moderate risk and returns. However, it is advisable to consult your investment advisor before making any investment decision, and require deeper market understanding, stricter eligibility, and patience to navigate complex strategies aimed at maximizing wealth while managing volatility and long-term financial goals effectively.
Frequently Asked Questions (FAQs)
What are the key differences between mutual funds and hedge funds?
The key differences between mutual funds and hedge funds are related to their fees, investment amount, and fund management style.
Who can invest in hedge funds?
In hedge funds, all types of investors can invest their money, but they are generally open to accredited or high-net-worth individuals or institutional investors, because of their risky investment strategies.
What is the fee structure of hedge-funds?
Hedge funds charge higher fees than most other investment options. They follow two types of fee structure, which include fixed AUM-based fees, and the other one is performance-based fees; however, there are a few asset management companies which offer a combination of both types of fees.
What is the minimum investment amount for hedge funds and mutual funds?
The minimum investment required in mutual funds is INR 100, but in the case of a hedge fund, it is INR 1 crore.
Can hedge funds or mutual funds offer guaranteed returns?
No, hedge funds or mutual funds both of them do not offer guaranteed returns. The investment is made in market-related instruments, which can lead to volatility and inconsistent returns.
