Difference Between a Hedge Fund and a Mutual Fund

While entering the stock market as a beginner, you may hear about a lot of investment options. But it is always up to you whether you look for high returns or stable returns.

Entering the world of investment, you may also have heard about mutual funds and hedge funds. Some investors also get confused about which one to choose based on their investment goals.

This blog differentiates between mutual funds vs hedge funds based on numerous parameters.

What is a Mutual Fund?

Mutual funds are a specific category of investment vehicle which pool money from investors and invest in a wide range of securities like stocks, bonds, and other securities. Mutual funds are regulated under the Securities and Exchange Board of India. Due to their accessibility, mutual funds are popular in India. As of May 2025, the mutual fund assets under management (AUM) stood at a record INR 72.2 lakh crore.

What is a Hedge Fund?

Hedge funds are also investment options that employ various strategies to generate returns for investors. They are managed using aggressive approaches like derivative trading and leverage in both Indian and global markets to generate high returns.

Therefore, hedge funds primarily attract a group of affluent investors who are ready to take risks to earn higher returns. In India, hedge funds are controlled by the SEBI under the category of Alternative Investment Funds (AIFs). The minimum investment for investing in hedge funds is comparatively set higher than that of mutual funds.

Key Differences Between Hedge Funds and Mutual Funds

Now that you understand the meaning of both mutual funds and hedge funds, let us check the key differences between a hedge fund and a mutual fund:

Mutual Funds vs Hedge – Key Differences Explained

Since you get a thorough overview of the differences between mutual funds and hedge funds, you can see that both cater to very different types of investors. The pointers below highlight their differences in more depth:

1. Fundamentals

   Anyone can invest in mutual funds and diversify their portfolios with long-term investment objectives. Conversely, hedge funds employ more complex investment strategies and are only available to private and HNI investors.

   Additionally, mutual funds provide the flexibility to investors for investing as little as INR 100. However, hedge funds need a minimum investment of INR 1 crore.

2. Investor and Investment Type

   Mutual funds are designated for every investor since there is no eligibility criterion for investing in these funds. On the other hand, only HNIs can invest in hedge funds due to the complex strategies and higher risks involved.

3. Holding Period

   Unlike the Equity-Linked Savings Scheme (ELSS), mutual funds have a minimum holding period requirement, which can range from several months to years. ELSS funds have a 3-year lock-in period, after which investors can redeem their investments.

   Hedge funds have a predetermined lock-in period, which restricts investors from redeeming the units. This redemption depends on the structure of the fund, which can range from a few months to several years.

4. Fees

   Hedge funds levy higher charges compared to mutual funds. The fee structure of hedge funds involves a 2 and 20 rule. This means a hedge fund company charges 2% of the fund as an asset management charge and 20% of the profit. Due to its active management of funds, hedge funds charge a higher cost of investing.

5. Asset Allocation

   Fund managers in mutual funds primarily invest in securities like stocks, bonds, and cash equivalents to generate long-term growth and return. They abide by the regulations of the SEBI, which allow them to invest in a limited range of securities.

Hedge fund managers have the flexibility while investing in a broader range of securities and often employ complex strategies to generate higher returns. The assets include bonds, stocks, commodities, derivatives, and even currencies.

Goals and Investment Strategies of Mutual Funds

1. Equity Funds

   You can invest in equity funds that invest in stocks if your goal is to earn higher returns with a high risk tolerance.

2. Debt Funds

   Debt funds primarily invest in fixed-income securities like government securities and bonds. Hence, if you do not want to take risks, debt funds can be the best for you.

3. Index Funds

   If you have passive investment goals, you may invest in index funds that replicate the performance of specific market indices like the Nifty 50.

4. Hybrid Funds

   You can invest in hybrid funds to maintain a balance between risks and returns. Hybrid funds invest in a mix of debt and equity instruments.

If you want to invest in mutual funds through both lump sum investment and a systematic investment plan (SIP), you can download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free.

Goals and Investment Strategies of Hedge Funds

1. Long or Short Equity

   This strategy is ideal for investors who want to take both long and short positions in equities to reduce market risk and gain from both rising and falling stock prices.

2. Global Macro

   If your goal is to bet on macroeconomic events or trends, you can use the global macro strategy. This helps you take advantage of changes in interest rates or major geopolitical events.

3. Event-Driven

   You can employ the event-driven strategy to benefit from any corporate events like acquisitions, mergers, or even bankruptcies.

4. Distressed Securities

   The distressed securities strategy allows you to invest in distressed or bankrupt companies to turn them around and generate higher profits.

Final Thought

While mutual funds are managed by professional fund managers and provide liquidity, hedge funds employ aggressive investment strategies to generate higher returns.

Additionally, mutual funds have a lower minimum investment, whereas hedge funds have higher minimum investment requirements. Hence, choosing between mutual funds vs hedge funds depends on your risk tolerance and investment goals.

Download the PL Capital application to invest in both mutual funds and alternative investment funds (AIFs), which invest in a variety of non-traditional assets, including hedge funds.

Frequently Asked Questions

1. Which is riskier among hedge fund or a mutual fund?

Hedge funds are considered riskier than mutual funds since they include aggressive investment strategies. These include leverage, derivative trading, and short selling. Hedge funds are also less regulated and have huge minimum investment requirements. Mutual funds, on the other hand, are highly regulated and are well-suited for conservative investors.

2. Is there any hedge fund available in India?

Yes, hedge funds are available in India. However, they operate under SEBI’s AIF regulations. However, only accredited investors can invest in these funds.

3. Are hedge funds more beneficial than mutual funds?

It depends on an investor’s investment goals and risk tolerance. Hedge funds may offer higher returns, but with increased risks. Contrarily, mutual funds are transparent investment options which offer stable returns and are ideal for investors seeking moderate growth.

4. What is an example of a hedge fund?

A prominent example of a hedge fund is Motilal Oswal Hedged Equity Multifactor Strategy AIF.