Hedge funds and mutual funds are popular investment vehicles in which investors entrust their money to fund managers and they invest their money in different kinds of publicly traded securities. But the fund management strategy in these two is entirely different.
Mutual funds
In mutual funds, funds are collected from the investors to invest in financial statements. These funds are being managed by the fund managers, they decide which stocks or bonds to buy and how much. Mutual funds have to declare their Net Asset Value (NAV) every day as SEBI governs them. This is the main difference between mutual funds and hedge funds. Here, the entire amount is distributed into small units and are purchased by investors instead of directly investing in stock markets. So, mutual funds are good for those who are not willing to take risks and handle market volatility. As the mutual fund is a collective investment, the risk is distributed amongst the investors. Equity funds, debt funds, and hybrid mutual funds are some of the mutual based on underlying assets.
Hedge funds
The hedge fund is a private investment vehicle that uses investment and risk management strategies to generate returns. As compared to mutual funds, a hedge fund is aggressive and is used by only high net worth investors. Here, the investment pool is often open to only a limited number of accredited investors. The hedge fund manager then invests these funds into different types of assets to generate maximum returns. Hedge funds are less regulated as compared to mutual funds. Hedge funds are highly illiquid as these types of investments are usually for the long-term. The unique feature of hedge funds is that it is not subject to the same regulatory requirements as mutual funds. Hedge funds are not registered and their underlying instruments can include securities, derivatives, and non-securities.
Whichever assets you choose to make your next investment, do not forget to compare these two!