What is Mutual Fund
Hey guys! welcome to fxtsignals blog. Now let me describe about mutual fund vs hedge fund.
A pool of money collected from many investors to invest in different sectors like stocks, bonds, money market instruments or other assets is called mutual fund which is managed professionally by experienced managers. Mutual fund is generally famous in investment sector. In 1924 1st mutual fund was established and offered by MFS investment management. It’s operated by the professional’s money managers who are skilled in allocating the fund’s assets and attempting to produce capital gains or income for the fund’s investors.
Its mutual fund which allows a small individual investor to invest in gigantic investing field like bonds, equities or other securities and gain more profits! Each shareholder or participators gain or loss the money proportionally. Investing a lot of securities and preforming in the total market cap of the fund, mutual fund is derived by the aggregating performance of the underlying investments.
KEY TAKEWAYS-
- A pool of money that is collected from many investors
- Invest in stocks, bonds or money-making investment site
- Operated by professional managers
- Great way to invest money in a gigantic site
- Divided profit end of month proportionally
- Maintenance fee 1-2% only
- Can be invested by anyone who is owned minimum investment
Here are some common categories of mutual funds –
Debt funds - funds that invest only in fixed income instruments
Hybrid funds - dividing investments between equity and debt to create a balance
Equity funds - funds that invest only in stocks and other equity related instruments
Money market funds - Investing in short-term money market instruments
How mutual funds work
Your investment can be increased in value in three ways when you buy into a mutual fund,
1. Dividend payments
It distributes a proportional amount of income achieved from dividends or interest from the securities in its portfolio to its investors. Purchasing shares in a mutual fund, anyone can choose to receive his/her distributions directly. Even they can reinvest in the fund also.
2. Capital gains
It is called capital gain when a fund sells a security and if it goes up in price. On the contrary, this capital goes in loss if it goes down when a fund sells a security. This net profit is distributed among the investors annually. Investors may see a large tax bill after a year especially high net worth individuals who might have to pay higher capital gains tax rates.
3. Net asset value
Mutual fund share purchases are final after the close of market, when the total financial worth of the underlying assets is valued. The price per mutual fund share is known as its net asset value, or NAV. As the value of the fund increases, so does the price to purchase shares in the fund (or the NAV per share). This is similar to when the price of a stock increases — you don’t receive immediate distributions, but the value of your investment is greater, and you would make money should you decide to sell.
To know about hedge fund please click here
Difference between Hedge Fund & Mutual Fund
Investment Strategy
Hedge fund typically is more aggressive than the mutual fund. Generally, hedge funds aim to generate a profit and it’s not their headache if the market is going up or down though investment strategies are differed from fund to fund. For this goal, the hedge managers have the ability to use high risk tactics.
On the other hand, mutual fund is not able to take high risk leveraged positions. It not only makes them less risky but also limiting their potential returns
Investors
Generally sophisticated and high net worth investors who have $1m or annual income over $200000 are investing in hedge fund. The minimum investment amounts to participate in hedge fund are far higher as a result.
On the other hand, those who have minimum deposit or investment from the low middle class or middle-class family are able to invest in mutual fund.
Investments
Hedge funds can trade freely in anything whatever they like such as currencies, bitcoin, stocks, derivatives, land, real state, public securities, life insurance, lottery tickets etc.
On the contrary, mutual funds are limited to invest in public securities like stocks and bonds.
Fees
Hedge funds charge both performance fee and management fee. Performance fee normally set at 2% and performance fee 10-30% from the profit returned. The most common fee structure is known as “two and twenty (2 and 20)”
On the contrast, mutual funds charge only management fee which is 1-2% only.
The main difference -
MUTUAL FUND | HEDGE FUND |
Don’t take share from the profit | 20% performance fee from the profit |
Availability insolvency of general individual investors | Its only for sophisticated high net worth investors |
Management fee normally 1-2% | Normally 2% charge management fee plus performance fee 10-30% |
Tend to perform worse than hedge fund | Tend to perform better than mutual fund |
Regulated by the US Securities and Exchange Commission (SEC) | Its general partnership and not heavily regulated by the SEC |
Availability to trade everyday because stock market is always open | It has limitation to invest and withdraw fund |