Mutual Funds Stock Tickers Scrolling Investment Options 3d Illustration
You’re ready to start investing. You want to see market returns and substantial growth in your retirement fund. But in your quest to put your money to work, there’s a problem you keep running into:
You’re struggling to choose an investment vehicle.
Because both methods involve pooling funds and diversifying your investments, the whole question of hedge funds vs mutual funds is a tough decision that many investors wrestle with at one time or another.
What makes more sense for your portfolio? Is one method better than the other? Read on to see if we can help you settle the hedge fund vs mutual fund debate.
What are Mutual Funds?
In basic terms, mutual funds are a type of investment product that takes funds from multiple investors and then uses them to purchase shares. And while many mutual funds are put together with the goal of outperforming the market, it’s not unusual to find others that are looking to track the index.
Although the whole concept of investment trusts and pooling investment resources goes back to the 19th century, the oldest surviving mutual fund was established in 1924. At this stage, mutual funds are an investment vehicle that’s well-established and well understood. In addition, because these funds are so popular, regular traders can often purchase shares through their brokers.
Why Invest in Mutual Funds?
If you’re looking for relatively low-risk returns, mutual funds have a lot going for them. Some of the benefits of investing in them include:
- Shares are available for regular trading
- Can be purchased on most regular stock exchanges with ease
- Passively managed mutual funds can reduce management costs
- Instant diversification because the fund will purchase a basket of shares and stocks
- Risk is spread across a pool of investors
- The money is handled by professionals
For many would-be investors, the appeal of mutual funds is that they’re cost-effective.
Hiring investment experts to manage your funds and invest on your behalf isn’t a viable option for many investors. And with the S&P 500 rising to over 4,000 points in 2021, buying even one share outright would take a long time for most people. Mutual funds allow you to build your portfolio while giving you access to multiple shares and stocks at a fraction of the price you would normally expect to pay.
What are the Downsides of Mutual Fund Investment?
Even though the benefits of mutual funds are certainly worth considering, there are still downsides associated with them. Here are some of the more common concerns associated with investing in mutual funds:
- The fees can take you by surprise if you don’t read the fine print
- If interest in the mutual fund declines, there’s no guarantee that you’ll be able to realize your capital gains
- You don’t have control over purchasing and management decisions
- Mutual funds can fall short of benchmark targets
When you get right down to it, the problems with mutual fund investment boil down to self-direction and control. If you’re not happy with the returns you’re getting, for instance, your main choices are to either keep the shares or leave. In addition, because the fees and costs associated with mutual funds can chip away at your returns, you’ll want to have a calculator handy if you intend to make this investment vehicle a major part of your portfolio.
What are Hedge Funds?
According to Business Insider, the first hedge fund was created in the 1940s. While this investment approach might not be quite as old as a mutual fund, it’s still a very well-respected method of generating returns on a portfolio.
Like a mutual fund, hedge funds involve pooling money for investment purposes. But there are some key differences.
For starters, hedge funds are private funds that aren’t typically publicly traded. In addition, these funds are often only available to accredited investors.
These funds are designed to not just track the market – hedge fund managers are aiming to beat the market altogether. And they’ve got a number of resources at their disposal to land the highest returns possible.
Why Invest in Hedge Funds?
For investors, there’s a lot to like about what hedge funds can do. Here are just a few of the key benefits of investing with a hedge fund:
- Returns are often extremely high
- Hedge funds can invest in shares, real estate, derivatives, and currency, among other investment avenues
- Hedge fund managers are often known for being some of the best investors in the business
- Risk is spread out across multiple portfolios
No matter which way you slice it, the benefits of hedge funds are palpable. For investors who have a high net worth, these market-beating returns are difficult to pass up. And because hedge fund managers are experts in their field, you can get all the benefits of expert trading across multiple avenues without having to do the heavy lifting on your own behalf.
What are the Downsides of Hedge Funds?
For all the positives associated with hedge fund investments, there are reasons why some investors may choose an alternative investment vehicle. These include:
- You need to be a high net worth investor to have access to mutual funds
- The losses can be huge
- Hedge fund fees can be extremely high
- Depending on the terms of your investment, your funds might be locked up for extended periods of time
You’ve heard the phrase, “high risk and high reward.”, right? Hedge funds are an example of this principle in practice. In the same way that you can get unbelievable returns one year, a down year could have a devastating effect on your portfolio.
Hedge Funds vs Mutual Funds: Which One Should You Choose?
On paper, hedge funds and mutual funds have a lot in common. But there are some important distinctions you’ll need to make in an effort to answer the hedge funds vs mutual funds debate.
If you want market returns at a cheaper price, mutual funds could be a good fit for your portfolio. But if you’re a high net worth individual who wants the benefits of leverage, derivatives, and aggressive trading with reduced risk, hedge funds may be an investment vehicle worth exploring.
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