Among the many investment tools available mutual funds are the most popular. Hedge funds are another investment tool, informs Scott Tominaga, an expert in investment tools mostly used by the rich and wealthy. Both forms of investment are managed by a fund manager.
What is a mutual fund?
There are trusts that collect money from investors who have the same objective and expectations from their investments. The profits that are realized from such funds are distributed among the investors in proper proportions after calculating the NAV or net asset value. The expenses and levies are deducted before dispersing the gained amount. This is what makes a mutual fund.
What is a hedge fund?
When private investors have a limited partnership and the money is invested using strategies that include leverage and trade of non-traditional assets. This is one of the riskiest forms of investment and accredited investors need to invest large capital.
Types of mutual and hedge funds
Mutual funds can be found in the following types: Money market funds, Bond funds, Stock funds, and Target date funds. The type of hedge funds found can be named – global macro, relative value, equity hedge funds, and activist hedge funds.
The major differences between mutual and hedge funds
The primary point of difference conveys Scott Tominaga is the strictness that the mutual funds are bound by, unlike the hedge funds which are comparatively leniently regulated by the Securities and Exchange Commission (SEC).
The next important is the cost-effective feature of mutual funds which enables one to invest in a diversified portfolio. This is hence accessible to the common man. The hedge funds on the other hand require huge capital even as the minimum investment and only by accredited investors.
The sectors in which a mutual fund can invest include bonds and stocks; hedge funds on the other hand can invest in stocks, real estate, currencies, derivatives, etc. The next difference that hedge fund experts such as Scott Tominaga would know is that it is not possible for an investor to withdraw their money at any time by selling the shares. They have to go through a lock period before they become eligible to do so. A mutual fund investor, on the other hand, is free to sell and purchase shares as and when they wish to.
Things to consider before investing
Irrespective of the tool being used for investment, there are certain things that need to be carefully looked into before making an investment. It is pertinent to remember that all investments are subject to market risks and one should be able to weigh out whether they are in a position to be able to face a loss if any happens to occur.
The following things must be closely monitored before attempting to invest any money in the market:
- Reading the documents carefully
- Understanding the risks involved
- Evaluating if any conflict of interest is present
- Understanding if any limitations are involved when redeeming the shares
Only after one is completely sure that the investment is suitable for them that the investment in any investment instrument should be made.
