A mutual fund or a hedge fund are investment methods with portfolios created by pooling in a large amount of funds. The aim is to generate returns based on various investment strategies. A mutual fund investment pool is made up of multiple retail and institutional investors. A hedge fund aims to gain its investment capital from high-net-worth individual
Although both have the same aim, they have multiple differences between them.
- Regulation
Mutual funds have multiple regulations associated with them. They are highly scrutinized and monitored by regulatory authorities. This makes mutual funds extremely transparent helping investors view what securities the mutual funds invest in. They have to be extremely transparent
As a hedge fund caters to high-net-worth individuals they don’t have to deal much with the regulatory bodies. They are less transparent compared to mutual funds. Although they are responsible to keep records to provide to their investors when required, they have no obligation to share them with the public.
- Structure
Mutual funds have to follow fixed guidelines that have a restriction on the funds they invest. Based on the type of fund they invest in a specific type of asset. It can be in only securities or debt-based assets, a mix of stocks and debt-based assets, etc. Even in securities, they invest in a specific type like small-cap, mid-cap, large-cap, etc.
A hedge fund has no restriction when it comes to the types of assets it invests in. A hedge can indulge in a specific segment like securities or debt-based investments. Unlike mutual funds, they can switch between assets without having to worry about voiding any regulations.
- Liquidity
A mutual fund is extremely liquid. Investors can invest and withdraw their funds on a daily basis. The regulation imposed on them ensures this is possible making it a good investment option
The liquidity of a hedge fund isn’t generally easy. A major reason is that a hedge fund collects a large corpus through a few individuals. Liquidating such huge amounts isn’t easy. Hedge funds are not mandated for quick liquidation hence it is slightly difficult to liquidate them compared to mutual funds.
- Fee Structure
Mutual funds have a specific amount that they charge to provide their services. They have to provide these charges beforehand. It generally goes by the term of the total expense ratio (TER) and is charged per lot of investment. Mutual funds consist of multiple investors and the goal is to outperform the market. Hence the charges are based on a percentage of the investment value of each investor.
A hedge fund is completely focused on profits. A hedge charges a percentage to manage the funds. Apart from this they also have an incentive model. This motivates the hedge fund manages to generate positive returns which benefits everyone involved. This is a reason why hedge funds invest in riskier assets compared to mutual funds.
- Investment Period
Mutual funds are an investment method that generally opts for long-term investment. They tend to invest in assets that grow in value in the long run. They are true examples of the power of compounding as the longer you’re invested in them the higher returns you can expect.
Mutual funds aim to generate profits as soon as possible. They opt for both short-term and long-term investment strategies. They even carry out futures and options investing to generate huge returns as well.
A mutual fund is generally compared to market indexes. There are many indexes they are compared to based on the segment they perform in. The various indexes are Sensex, Nifty 50, Nifty Bank, Sensex midcap, Nifty 100, S&P BSE SENSEX Next 50, etc. A mutual is said to be a good investment if it performs better than an index. Let’s assume the market isn’t performing well and has a -15% return in the past 1 year. If a mutual fund provides a return of -10% or – 12%, it is a good investment option.
The performance of the hedge fund is completely based on the returns it is capable of generating. If it is unable to get returns or faces losses, it’s not considered a good investment option. Hedge fund managers face huge scrutiny and are held liable for any losses. Due to the incentive system, hedge fund managers’ sole focus is to get as much return as possible. This must be done irrespective of market conditions. Even if the market is falling, it is considered a bad sign for the hedge fund to lose money.
These are the f major differences between a hedge funds and mutual funds.