.gif)
.webp)
.svg)
What are Mutual Funds?
Mutual funds are an investment vehicle that pool money from the public and invest the accumulated corpus in stocks, bonds, money market instruments and other securities. The USP of mutual fund schemes is that they offer risk diversification by exposing the investor’s funds to various asset classes and securities.A mutual fund is basically an established trust that appoints an experienced professional, i.e. a fund manager to manage the scheme's portfolio. The fund manager devises investment strategies on behalf of the investors and makes trading decisions. Mutual fund investors enjoy the convenience of quick entry and easy exit (except in case of close-ended schemes), automated payments, etc.
What are Hedge Funds?
Hedge funds operate within a similar structure as that of mutual funds. However, they are not publicly launched like mutual funds but privately offered. The portfolio structure and investment strategy of hedge funds is rather complicated as their investor base includes sophisticated entities like banks, financial institutions, high net-worth individuals (HNIs), insurance companies and retirement funds. For this reason, hedge funds need to be proactively and aggressively managed.
Mutual Funds vs Hedge Funds
| Basis | Mutual Funds | Hedge Funds |
| Structure | Publicly traded | Privately placed; not available to retail investors |
| Investment Strategy | The investment strategy usually aligns with the pre-specified investment objective and does not necessarily employ leveraging techniques. |
High-risk tactics such as:
|
| Management | May be passively or actively managed, depending on the type of scheme | Actively managed |
| Fees | Charge management fee which is recovered with other administrative expenses through the expense ratio | Charge management fee as well as a performance fee |
| Purpose | Creation of wealth, income-generating source, tax-saving, etc. | Arbitrage, hedging, speculation trading, earning on capital gains, etc. |
In Conclusion Thus, it can be understood that hedge funds hugely differ from regular mutual funds in terms of their structure, strategies, management and purpose. While the two may seem similar in their essence, they are actually meant for completely distinct investment objectives and lie on two extreme ends of the spectrum.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.