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  • BSE SENSEX
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Hedge Funds Vs Mutual Funds

The difference between hedge funds and mutual funds is not known to many individuals. This may be obvious for those already in the investment business, but for beginners, the various types of funds out there can be quite confusing. Knowing the information is crucial when it comes to investment, as it takes clarity to achieve your investment objectives as rapidly as possible. The following article explains the difference between hedge funds and mutual funds.

Mutual Funds

It is an investment collection (made possible by many investors) which skilled money managers manage professionally. The advantage of such investment is that the rate of return that comes with it can be earned. Fund managers are using the pooled amount of cash and spreading it across many kinds of investment. Overall, the risks are reduced. Compared to the stock market, your money would not fluctuate significantly.

In reality, you are effectively recruiting a professional fund manager for a comparatively small cost when you invest your hard-earned money into mutual funds. Comparing risk factors and experience, if you invest in individual securities yourself, it is sometimes difficult to compete with them.

Hedge Funds

Hedge funds are still at an early stage and are not as commonly recognized as other mutual funds. Despite pooling investments from different investors too, they use extremely complicated approaches to 'hedge' risks and produce high yields.

Hedging implies safeguarding and protecting against risks in the context of investing. A hedge fund utilizes the funds raised by accredited investors such as banks, insurance companies, High Net-Worth Individuals (HNIs) & Families, and endowments and retirement funds. That's why these funds often work as investment corporations in foreign or private investment associations. They don't need to be registered with SEBI and they don't need to regularly reveal their NAV like other mutual funds.

A portfolio of hedge funds is made up of asset classes such as derivatives, equity, bonds, currencies, and convertible securities. They are therefore also regarded as alternative investments. They need aggressive management as a set of assets that strive to' hedge' the investor's money against market ups and downs. Unlike the typical equity mutual fund, they tend to leverage significantly. They hold long as well as short positions, including positions in derivatives listed and unlisted.

Hedge Funds vs. Mutual Funds

  • Investment Stance

    Hedge funds are usually aggressive about their investments and pursue greater yields through the use of speculative positions and derivatives and options trading. They may take brief market positions (Short Sell), whereas mutual funds are unable to do so. Short selling enables these funds to profit even in declining markets, which is not the case with mutual funds.

  • Leverage

    Mutual funds are safer because they have little leverage, whereas hedge funds have a tremendous amount of leverage and therefore attract higher risk.

  • Investors

    Hedge funds are only accessible to investors of high net worth whereas the large group of individuals can access mutual funds with the quantity as small as Rs. 500.

Conclusion

In brief, hedge funds are relatively high-risk funds aimed at greater yields than mutual funds. Choose wisely and verify whether the approach of the manager works for you. A hedge fund is just one of the investment avenues and evaluating various alternatives requires an in-depth survey.


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