What’s the difference between mutual funds and hedge funds

There’s no shortcut to get rich quicker and faster. You always have to explore multiple options in order to increase your wealth. But how do you do that? Where should you invest? Because we all know that a 9 to 5 job is not going to make you rich. You need to make a strong investment plan and follow it religiously – obviously by adhering to the advice of experts. If you want to invest, then you must understand the difference between a mutual fund and hedge fund.

In this article, we will go through both the investment ideas one-by-one and then we will leave you to choose the best option for yourself. Whatever you choose, if you are investing your hard-earned money into something, you must make an informed decision.

Difference between mutual funds and hedge funds

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What are mutual funds?

Mutual funds basically define the process in which investors’ money is being used by such fund managers to buy bonds, securities and other stocks. If you want to invest in risk-averse stocks, then mutual funds are the best deal. It generally focuses on making small investments and then waits for them to increase in the years to come. It works through exchanges and by developing a prospectus, which gives an overview of the objectives and strategies. This practice is mandatory in mutual funds, which helps to gain the trust of the investors.

The ease to invest and gain profit even with limited savings attracts the retail investors. Moreover, the investors don’t have to manage their funds by themselves. The fund managers assist them and ensure that they get maximum returns on their investment lawfully.  Moreover, if you are planning on investing in mutual funds, you will get multiple other benefits as well.

Mutual funds allow diversification into different stocks, which reduces the risk. It also offers transparency about the performance to the investors and makes the comparisons easier by producing annual reports and periodical disclosures. Moreover, with mutual funds, you can also invest in the international market, which may not be possible with individual investments. Other than this, it also offers liquidity because you can resell the shares you had bought at an equal price of the Net Asset Value of the shares.

However, no one can predict your income from these shares. Moreover, the funds have to adhere to the objectives and strategies, it is why if the gains are not equal to what is stated in the prospectus then those funds cannot be bought. 

As of now, you must have understood what mutual funds are, now let’s talk about hedge funds.

What are hedge funds?

Hedge funds are private funds in which the investors invest with huge capital to gain regular or above-average profit. Although fewer investors invest in hedge funds, the base of these funds is stronger and healthier than mutual funds. Hedge fund investors usually invest big amounts, which can also result in huge losses, and in some cases. Basically, with hedge funds your entire investment remains at stake. The minimum limit according to the Offering Memorandum to invest into these funds is not lesser than $10 million.

Unlike mutual funds, hedge funds don’t need to make periodic reports under the Securities Exchange Act. Moreover, hedge fund managers manage and decide on investment. Moreover, they ensure that the funds are functioning properly. Apart from that, if your hedge funds under Asset Under Management exceed more than $100 million, you must get yourself registered with the US Securities and Exchange Commission.

One of the key elements to attract investors towards hedge funds is above normal returns on investment in a shorter time. Apart from higher returns, a hedge fund investor also gets many more benefits. Let’s have a look at them.

With various hedging strategies, you can secure your profits and investment from the declining markets and can further benefit from the falling prices of the market. Moreover, you can also do short-term selling, which means that you can sell your shares to someone else with a promise to buy them back at a later date. Apart from this, you can also adjust to the existing market situation and can gain profits via diversification and allocation of assets. With this, your hedge fund manager will also make sure that you get maximum return on your investment and will take all the risks to achieve the target.

However, when investing in hedge funds, the risk is relatively high and the fund manager needs to be cautious while deciding on where to invest. Moreover, as the returns from hedge funds are not correlated to the traditional market, the investor will be able to profit in the volatile market and the fall or rise of the market doesn’t ensure a fall or rise in the return.

Bottom Line

If we are to identify the difference between mutual funds and hedge funds, we can simply say that the former carry less risk and offer less reward. Whereas, hedge funds are high-risk investments and offer higher returns.

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