There are plenty of options available in the market to make debuts in investing.
People are becoming more and more aware of the opportunities. And no one wants to be left behind.
There are 2.36 billion active investors in India now. With increasing enthusiasts in the field, people are exploring vehicles of investment present in the market.
However, there are some types of investment that appear to imitate each other. This can create confusion among new investors.
Hedge fund, mutual fund and ETF makes the top of this list.
The above said terms are pretty much common in nature yet different in several aspects.
Mutual fund, hedge fund and ETF are all pooled investments. That is, fund managers use a basket of people willing to invest in the securities and collect the fund from them.
Then after, they use this money to buy stocks or the units of the type of investment they want. Then they distribute the Profit based on the funds and performance.
To dive in deep into the difference and make strong judgement about these instruments of investment, let us do a quick background check about the aforementioned terms.
Hedge fund is relatively unpopular type of investment in India. This is because this fund requires a huge amount to start investment.
This investment instrument might not suit best for people with average financial status.
Hedge fund is pretty much like mutual fund. It pools money from big investors. These ‘big investors’ mean people who can risk a minimum of 1 crore.
High net worth individuals, banks, commercial funds are their regular customers.
Hedge funds expose risk to funds to a great degree. This is the reason that they offer returns as high as 15%.
The amount accrued from the investors is invested in the companies. However, hedge funds are not traded like mutual funds or ETF.
They are led privately among companies and fund managers. This is because hedge funds are mostly private limited.
This highlights another feature of the hedge fund which is, it doesn’t apply to SEBI’s regulations. Hedge funds do not need to act on the market terms laid down by SEBI. They don’t even need to disclose their NAV.
But, hedge funds offers diversification to the investors. People can invest in any type of securities ranging from equity, debt, and shares to futures and options.
Hedge fund is an aggressive investing because of the underlying risks and extreme funding.
It is not much easy going with the liquidity as well. An investor’s money is locked in till at least one year of investment.
Mutual fund is a famous investment option present in India. People are rushing towards mutual fund investing because of the effective performance and laid-back operations.
Investing in mutual fund is so easy that people fund a lump sump amount in here and forget it for the far future.
Thanks to its diversification and numbers of options available, people have begun to trust and invest for their financial betterment.
But this doesn’t mean that mutual fund is risk-free. The Mutual fund carries potent risk as well.
However, this risk is meagre compared to hedge fund.
People who do not have risk appetite or do not want to worry behind the day-to-day investment choose for mutual funds.
Mutual fund pools money from investors just like hedge funds and use this money to further buy stocks.
But, the major difference between hedge fund and mutual fund here is that, hedge fund do not promise the return whereas, some types of investment in mutual fund promises the return.
And if, the fund manager goes bankrupt or something bad happens in the market, you get an insurance of minimum 1 lakh.
People here, get to customize their experience and finance to a great extent giving them the ease of investing.
ETF is Exchange-Traded Fund. It is managed through pooled investing just like its counterparts.
But, it resembles the share market more than it resemble the mutual fund.
To trade in ETF, a person must register with a broker. The broker here is the one who will help you carry out your transactions.
ETF contains unit of all types of securities, and it is traded in the market just like stocks.
ETF tracks the index of the companies being traded in. A person can buy any number of stock in any type of security here.
It is traded all through the day by any number of times unlike the Mutual fund. In a mutual fund, a person can make a single transaction after the end of trading day.
It is also popular for its tax efficiency as low tax is levied upon it.
The price of the stocks keep changing all through the day. Thus, ETF is a passive investment.
These investments are considered to be less risky.
Let us now draw a wind-up difference among these terms.
On the parameter of risk, the hedge fund seems to outgrow mutual fund and ETF.
Here, the mutual fund carries risk based on the type of investment made and ETF carries relatively lesser risk than any of these.
Comparing on return, the hedge fund again stands on the top with return rate as high as 15%. However, this return is quite uncertain.
Mutual fund offers much consistent return and ETF offers a favourable return as well.
Hedge fund is illiquid whereas mutual fund and ETF highly liquid.
Mutual fund and ETF are regulated by SEBI. Therefore, they are accountable and checked.
Hedge fund on the other hand does not go by SEBI’s regulations.
The Bottom Line
Hedge fund, mutual fund and ETF might appear similar in some aspects, but they have too big contrast to confuse together.
Understanding the pros and cons can help anyone make out the difference among these terms.
Therefore, be informed and choose wise.