Difference between Hedge Funds and Mutual Funds
Hedge Funds and Mutual Funds are two instruments through which Investment can be made in various instruments available in the market. Hedge Funds are basically private investment portfolios specifically used by the richer class whereas Mutual Funds are more associated with regular investors having one common objective.
What are Hedge Funds?
Hedge funds are a type of private investment portfolio that use advanced risk management and investment techniques to produce profitable returns by investing in a variety of assets. Only a small number of authorized investors are permitted in the fund, and they combine their funds with the fund management to invest in a variety of assets. For managing funds, the fund manager gets charged a fee that is based on the profits earned by the fund’s assets.
Key Features of Hedge Funds:
- Wide Investment Range: Hedge funds can invest in a variety of assets, including stocks, bonds, commodities, derivatives, and real estate.
- Active Management: Hedge funds are actively managed, employing complex strategies to achieve high returns.
- High Minimum Investments: Hedge funds typically require significant minimum investments, often accessible only to accredited investors.
- Performance Fees: Hedge funds charge performance-based fees, often including a management fee and a percentage of profits.
- Leverage Use: Hedge funds frequently use leverage to amplify returns, which can increase both potential gains and risks.
What are Mutual Funds?
Mutual Funds can be defined as money pooled by a large number of people (Investors) having one common investment objective. The money collected under the scheme, usually run by an asset management company, is then invested in equities, bonds, money market instruments, and other securities by professional fund managers of the Mutual Funds. The portion of holding of the fund is provided as ‘Units’ to each investor in proportion to the amount invested by them. The income generated from the scheme is distributed among all the investors in proportion to their investment, by calculating Net Asset Value or NAV.
Key Features of Mutual Funds:
- Diversification: Mutual funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities.
- Professional Management: Managed by professional fund managers who make investment decisions on behalf of investors.
- Liquidity: Mutual funds are generally highly liquid, allowing investors to buy or sell shares on any business day.
- Affordability: Investors can start with relatively low minimum investments, making mutual funds accessible to many.
- Variety: There are various types of mutual funds available, including equity funds, bond funds, index funds, and money market funds.
Difference between Hedge Funds and Mutual Funds
|
Basis |
Hedge Funds |
Mutual Funds |
|---|---|---|
| Meaning | A hedge fund is a portfolio of investments in which a small group of eligible rich investors pool their money to purchase assets. | Mutual funds are trusts in which the resources of multiple investors are pooled together to purchase a diversified basket of securities at a reasonable cost. |
| Return | Return is absolute. | Return is relative. |
| Management | It is managed aggressively. | Comparatively managed less aggressively. |
| Owners | It has few owners. | It has thousands of owners. |
| Investor type | Pension funds, endowment funds, and high-net-worth individuals are basic investors of hedge funds. | Retail investors are the investor of mutual funds. |
| Regulation | There are less regulations. | It is strictly regulated by SEBI. |
| Fees | The fund manager charges a fee that is based on the profit earned by funds. | It is totally based on the percentage of assets managed. |
| Transparency | Information is provided to investors only. | Annual reports are published and semi-annual disclosure of the performance of assets. |