These two can be confusing to non-investors. People who have already invested more or less amount into any of 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 types of investment schemes but also the way your invested amount will be diversified.
Hedge Fund vs Mutual Fund
The main difference between Hedge fund and Mutual fund is that mutual funds will provide you with a minimum return rate that is known as the risk-free rate. On the other hand, the hedge fund will try to maximize your return on your investment.
A hedge fund is an investment that is 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 mostly known as a safe investment for its risk management procedure and better diversification. In this case, your invested amount will be diversified into stocks, bonds, money market, etc. There are different types of mutual funds, and it is available in small investments as well.
Comparison Table Between Hedge Fund and Mutual Fund (in Tabular Form)
| 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 the people who can invest in small or medium amounts. Most of the people are qualified to spend in this as the minimum investment is set to very low. |
| Profit margin | The profit margin in hedge funds is pretty higher than mutual funds. | In this case, the investment is kept to a minimum amount, that is why profit to investment ratio also reduces because of it’s lower risk. |
| Ownership | There can only be a very few wealthy owners when it comes to 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 a maximised profits. It is allowed to invest in global assets such as any art, real estate, etc. | Managed in a way to keep it risk-free, and 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 its investors. | Mutual funds are transparent and must publish their annual report of performance publicly for its 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 out of 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 a minimum of one year so that the investment can be distributed evenly in various aspects for better opportunities.
Since you can only withdraw quarterly or bi-annually, you must consider some key points regarding Hedge funds –
- The growth in 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.
- Always 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 as fees.
The main characteristics of hedge funds are that they do every investment using borrowed money. They will make a broader investment in almost everything, including – lands, real estate, currencies, etc.
In short, hedge funds are a high-risk investment with higher returns compared to mutual funds. You must study the asset management and know what strategy works for you before investing.
What is Mutual Fund?
Mutual funds are an investment scheme that is recommended for the majority of people. The minimum investment is meager, 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 of the people chose this path to invest their hard-earned money. There are some key characteristics of mutual funds that you should know –
- There are three types of mutual funds – Debt funds, Equity funds, and Hybrid funds.
- You can invest and withdraw your mutual funds on any business day at Net Asset Value, and it is 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.
You could invest in mutual funds for short, medium, or long-term depending on your need. This means your investment could last from 18 months to 5 years.
Main Differences Between Hedge Fund and Mutual Fund
- SEBI strictly regulates mutual funds, but it is not mandatory for hedge funds.
- The withdrawal process of mutual funds is more straightforward for the short term processes, whereas in the case of hedge funds, the investment is locked for a specific time, that is why withdrawals are not possible.
- Mutual funds come with risk-free policies, whereas hedge funds are hazardous to invest.
- Hedge funds are only available for investors of high net worth. On the other hand, anyone could invest in mutual funds.
Conclusion
In the end, you must research both the sectors properly before investing. One comes with high risk, and the other is risk-free with a firm return policy. The fees of both these sectors are arguably different from one another. Calculate and strategize the plan that works for you.
Hedge funds may get you a return of up to 15-20% on your investment, but if it is your first time, then you should avoid this at any cost and gain experience in mutual funds first. If you are looking to save your tax, then mutual funds are a good starting option, but if you are experienced and wealthy enough for hedge funds, then go for it.
References
- https://www.worldscientific.com/doi/abs/10.1142/9789812569448_0004
- https://www.aeaweb.org/articles?id=10.1257/jep.21.2.175