In a way, there are a lot of similarities between Mutual Funds and Hedge Funds. In the both types of investments, a group of investors pool their money and invest in different type of securities. The main misconception about the funds is that people think that they are similar and the terms are interchangeable. In reality, they are not same and there is a very thin line between them. The main difference between these two funds is that in a Hedge fund the number of investors is very less while the Mutual fund has a large number of investors.
In simple words, a mutual fund can be considered an investment vehicle in which a group of people pools the money and a fund manager invests those funds in different securities. The manager often charges a fee for the administration of the fund, which depends on the size of the investment.
A hedge fund is an investment portfolio which is managed under investment partnership. These types of funds are a private portfolio of investments which uses highly advanced strategies for the investment and risk management.
The key differences between Mutual and Hedge funds
- A hedge fund is a privately owned portfolio investment in which only a few investors are allowed. However, a mutual fund is a professionally managed investment plan where a number of investors pool their money to buy securities.
- The main aim of hedge funds is assured returns while mutual funds aim at relative returns.
- The owner of mutual funds can be thousands in number while in hedge funds the number of investors is very limited.
- The hedge funds are managed with highly advanced strategies and risk management techniques to ensure good returns which are not in the case of mutual funds.
- The hedge funds have high profile investors while the mutual funds include retail investors who invest relatively small amounts.
- Hedge funds have very limited regulations from the government side, however, in the case of mutual funds, the Securities Exchange Board of India (SEBI) issued guidelines from time to time.
- In the hedge funds, the management fees depend on the returns on the investment while in the case of mutual funds the management fees depend on the assets that are being managed.
- In mutual funds, the asset manager does not hold any substantial interest while in hedge funds the person or company that manages the funds also owns a large part of the investment.
- When it comes to mutual funds, the reports about the investments and returns have to be published yearly. Also, the disclosure of the investments has to be made public every six months. While in hedge funds the information about the investments and returns is released to the investors only.
The investments in both funds depend basically on the recourses you own. If you have a lot of funds you can invest in hedge funds. In case you have limited resources, you can choose to invest in one or two mutual funds depending on what kind of returns you are looking for.