Finance

Which Are Better Mutual Funds Or Hedge Funds & How To Invest In MF?

Mutual and hedge funds are both financial vehicles that give investors access to managed portfolios, but that’s about where similarities end. To generate profitable returns for customers, hedge funds focus on high-net-worth people and engage in more complicated and volatile trading tactics. Investors can invest in mutual funds, but their trading options are more limited. A mutual fund manager’s primary objective is to outperform an index.

The key difference between Hedge Fund vs Mutual Fund

  • While mutual funds consist of a large number of little investments that may be as low as Rs 500 for an investor, hedge funds are distinguished by their small number of huge investments, which could be at least Rs 1 crore for each investor.
  • While a mutual fund’s objective is to produce returns above and beyond the benchmark or risk-free rate of return, a hedge fund aims to maximise returns from the investment.
  • Hedge fund management costs typically work on a 2/20 basis, consisting of a 2% charge as annual fees and 20% net profits. These fees depend on the performance of assets. Managers of hedge funds do not split the losses. Management costs for mutual funds are calculated as a percentage of the assets under management.
  • Investments in hedge funds typically have a 3-year lock-in period, after which redemption is done in batches. Since most mutual fund investments have substantially shorter lock-in periods and are easier to redeem, they are comparatively more liquid securities.

Where does a mutual fund score over hedge funds in disclosure of information?

Hedge funds run like very exclusive clubs. Even joining a hedge fund is typically only possible via invitation. Only the fund’s investors, and even then only on a limited basis, are given information about the fund’s strategy, asset mix, returns earned, etc. Consider types of mutual funds before making any investment.

SEBI mandates that mutual funds publish their fund fact sheets and performance information online. You can view this information on the mutual fund’s website even if you are not an investor. Mutual funds unquestionably beat hedge funds in terms of transparency and disclosure.

How do Mutual Funds Work?

The pooling of resources gives mutual funds their strength. A mutual fund scheme requires relatively smaller initial investments. This gives small retail investors access to many markets and allows them to benefit from professional money management. It exposes you to marketplaces you might not otherwise be able to reach.

The investment sum is gathered and given to professionals referred to as “Fund Managers.” On behalf of the scheme’s investors, they invest the money that has been pooled. These managers choose the securities to invest in and the proportions of those investments. However, there are several rules that fund managers must follow while making judgments.

They also depend on the scheme’s design, investment goals, and other legal constraints. Investors also choose the right fund based on their investing pattern and objective, which should be consistent with their investment goals. For example, conservative investors may choose capital protection plans, while risk-takers may choose to invest in the mid- or small-cap parts of the equities market.

The variety of investment mandates and objectives helps categorise and further categorise mutual fund schemes. It is broadly divided into the following tiers of asset classes: equity funds, liquid funds, bond funds, balanced funds, gilt funds, and others.

Conclusion

Both hedge funds investment and mutual funds investment are the vehicles where many investors combine their funds to be professionally managed and invested in various securities.

Hedge funds are, therefore, only accessible and practical for financially secure and aggressive risk-takers. First-time depositors are typically recommended only to accept these funds once they have developed experience in investing because the deposit level, risk level, and expense ratio are substantially greater with little liquidity and transparency. Mutual funds, in contrast, are intended for regular investors who are somewhat risk-averse but want to see their money increase over the long term.

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