Hedge Fund vs Mutual Fund: Know the Key Difference

As your investable wealth grows, the universe of investment options expands beyond the familiar. You move from simply choosing between equity and debt funds to navigating more complex structures. Two mainstays of portfolio construction are mutual funds and a less-understood category known in India as Alternative Investment Funds (AIFs), colloquially known as hedge funds.

While both serve to pool investor capital, they are fundamentally different in their design, regulation, and purpose. Mutual funds are structured for broad retail participation, governed by SEBI’s regulations designed to protect a wide investor base. AIFs, or hedge funds, conversely, are sophisticated vehicles designed for accredited investors who understand and can assume higher levels of risk for potentially higher, non-market-linked returns. 

Understanding the sharp distinctions in their strategy, liquidity, fee structures, and regulatory oversight is critical for any investor graduating to the next level of wealth management.

Let’s break down the key differences between these two powerful, yet distinct, investment vehicles.

What is a Hedge Fund?

A hedge fund is a privately managed investment pool that uses varied strategies to generate high returns. These may include short selling, leverage, derivatives, arbitrage, and global macroeconomic plays. The goal is to outperform the market, not just match it.

In India, hedge funds fall under Category III of the SEBI (Alternative Investment Funds) Regulations 2012. They are mainly open to high-net-worth individuals (HNIs) and institutional investors due to their high-risk and entry barriers.

A hedge fund is not subject to the exact regulatory requirements as mutual funds. They are also not bound to disclose their Net Asset Values (NAVs) at the end of the day. 

Who Should Invest in a Hedge Fund?

Hedge funds are not designed for the average investor. 

They require:

• A minimum investment of ₹1 crore, rendering them accessible only to the financially well-off such as HNIs and UHNWIs.
• A high-risk appetite, as fund managers buy and sell assets quickly as they try to keep up with the market movements.
• Knowledge of complex financial instruments 

What is a Mutual Fund?

A mutual fund is a trust for collecting money from investors. The money is then invested in different asset classes according to the investor’s investment objective. 

Mutual fund investors can enjoy economies of scale by pooling their money. They can purchase stocks or bonds at much lower trading costs than direct investing in capital markets. An investor can also get additional advantages such as diversification, expert stock and bond selection, lower costs, convenience of investment, and flexibility.

Investors receive units proportional to their investment, with losses limited to the amount invested.

Mutual funds are highly regulated by SEBI. They have to give daily NAV disclosures and periodic reports to maintain transparency.

Who Should Invest in Mutual Funds?

Mutual funds are well-suited for people:

• With clear investment objectives
• With a moderate to high-risk appetite 
• Looking to diversify their portfolios while keeping risk under control
• Who don’t want direct exposure to equities markets (in the case of equity mutual funds)

Hedge Fund vs Mutual Fund: Key Differences

The following table points out the main differences between mutual fund vs hedge fund.

Basis of Difference	Hedge Fund	Mutual Fund
Regulatory requirements	Regulated under SEBI (Alternative Investment Funds) Regulations 2012	Regulated under SEBI (Mutual Funds) Regulations, 1996
Investor category	HNIs, banks, commercial firms	Open to all investors
Disclosure	Disclosure of NAVs not required	Disclosure of NAVs is necessary at the end of the day
Underlying securities	Equities, money market instruments, currencies, real estate, derivatives, convertible securities	Equities, money market instruments, cash
Risk	Very High Risk	Moderate to High
Minimum ticket size	₹1 crore	Not uniform but as low as ₹500 in some funds
Investment strategy	Complex (leverage, derivatives, short selling)	Simpler, no short selling allowed
Fees	Management and performance fees	Percentage based. Depends on the assets managed.
Transparency	Low (limited disclosures)	High (daily NAV, periodic reports)
Liquidity	Low (lock-in periods, exit restrictions)	High (can be redeemed easily)
Fractional Units/ Shares	No	Yes
Taxation	Taxed as AIFs (pass-through structure may apply)	Taxed based on holding period and asset class

Mutual Fund Vs Hedge Fund: Which is Better?

Mutual funds and hedge funds are investment options that suit different investors. Hedge funds are high-ticket investment options, so not every individual can opt for them. Hedge funds are popular among high-net-worth individuals, institutions, and corporations. 

Conversely, mutual funds are suitable for all types of investors. You can start investing with as little as ₹500. Mutual funds allow you to invest either through lumpsum or SIP. These are long-term investment options that have the potential to generate remarkable growth.

Thus, depending on your financial position, investment objective, risk tolerance levels, and investment tenure, you can choose between a hedge fund and a mutual fund.

Final Thoughts 

Hedge funds and mutual funds both serve distinct purposes. Hedge funds aim for higher potential returns through high-risk strategies and are accessible only to the wealthy. Mutual funds, on the other hand, provide a regulated and simple way for retail investors to build wealth over time.

Understanding the risk, cost, and suitability of each can help you make a confident investment decision.

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