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Hedge Fund vs Mutual Fund vs Index Fund – Which is the Best

The desire of every investor is to locate an investment vehicle that has fewer risks but can guarantee them maximum returns on their investment with less stress. But the truth is that, if you want to make great gains as an investor, you would have to learn to handle and manage risks. Without a shadow of doubt some of the investments that will give you the greatest returns on your investment carry the biggest risks.

There are several investment vehicles available for investors, but for the purpose of this article, we will compare three of the top investment options available. They are Hedge funds, Mutual funds and index funds. If you are well equipped with the right information, you are sure going to invest rightly and make good returns on your investment. To start with, what is Hedge fund?

What is Hedge Fund?

Hedge fund is simply described as an offshore investment fund that is formed as private limited partnership that engages in speculations making use of credit or borrowed capital. Hedge funds explore every available market and they make use of various investment strategies and financial instruments. One thing about hedge funds is that it can be very volatile; the risk involved is much so also the profit margin is much as well.

As a matter of fact, hedge fund is one of the world’s top investment vehicles and you stand to get good returns on your investment annually if you invest in hedge funds. Hedge fund operates with little or no regulations from the of America Securities and Exchange Commission (SEC). As a matter of fact, hedge funds can not be sold to the general public just like mutual funds.

What is Mutual Fund?

Mutual Fund is simply a professionally managed investment vehicle that is funded by various shareholders who trade in diversified holdings; it is a collection of stocks and bonds. Investing in mutual funds generate capital gains. When compared to hedge fund, mutual funds are less volatile. Unlike hedge fund that is not regulated, mutual fund is highly regulated and they are sold to the general public. Another advantage you stand to gain with mutual fund is that you have the options to chose the stock, and bond you want to invest in. With mutual funds you have the options to also invest in global funds, sector fund, country funds or regional funds et al.

Investing in mutual fund gives you the opportunity to work with investors with same investment philosophy like you; you will be able to pool your money together with people who can provide the support structure that you need to achieve your investment goals. It is important to state that mutual funds are not taxed on their income and profits especially when they comply with the lay down requirements under the United States of America Internal Revenue Code.

With mutual funds you can participate in investments that may be available only to big time investors. Some of the draw backs of investing in mutual funds are the administrative fees which is usually high, the income you stand to gain are not predictable and with mutual funds, you can not customized your investment portfolio.

What is Index Fund?

Index fund simply put are mutual funds or exchange traded funds (ETF) that are intended to track the returns on investment of a market index. Index funds charges less administrative fee when compared to both mutual funds and hedge funds; in essence it is far cheaper to invest in index fund. Index fund is not complicated, as a matter of fact; it is easier to understand when compared to mutual funds and hedge funds.

One disadvantage with index fund is that there is the possibility of generating tracking error in a falling market. Another disadvantage with index fund is that it has lower turnovers when compared to hedge funds and mutual funds.

If you critically examine hedge funds, mutual funds and index funds, you will realize that they all have their advantages and disadvantages, so if you are looking for which is the best amongst them, then you would need to consider the reasons why you want to invest and if possible the capital you have available and the time frame you looking at investing your money.

In essence, there are other personal factors that will help determine which the best investment vehicle to use. But if you are starting out as an investor, you can consider starting with index funds; it is cheaper, and easy to understand how it works.

But if you have a solid capital base, then you should consider investing in hedge funds. Although the risk is much, but you are sure of getting good returns on your investments if things go as planned. If you are not a good risk taker but you want to invest and make money, then you should consider investing in mutual funds, but you should be ready to pay high fees et al.

Over and above, the investment choice you make should reflect your investment philosophy and should be able to deliver the financial goals that you set for yourself.