Mutual and hedge funds are two of the most popular investments in the market. Unfortunately, most investors do not do their homework and find out more about these investment funds. As a result, they end up paying exorbitant fees that push down investment returns. The article will give you a basic understanding of these funds and help you evaluate your investment fund’s peformance.
Knowledge is Power
Among several investment opportunities, mutual funds and hedge funds are two
of the most popular, most misunderstood, and somewhat controversial.
With over 19,000 mutual and hedge funds looking for investors, one of these
days you may receive a call, e-mail, a personal visit or letter pitching the
merits of investing in these funds, if you have not gotten any yet.
Mutual funds and hedge funds share the same basic characteristics but have
major differences. Knowing what they are will protect you from overly
aggressive salespersons and help you tell the difference between promise and
reality.
In recent months, the government has cracked down on mutual and hedge funds
that engaged in questionable practices, mostly related to fees charged and the
way fund size was used to manipulate the financial markets.
By investing your funds with mind and eyes open, you will better understand
and reap the benefits these funds have to offer.
Mutual and Hedge Funds are Partly the Same
Mutual funds and hedge funds have three basic similarities:
Pooled investments
Invest in publicly traded
securities, and
Professional management
In a pooled investment, several investors put their money together and
entrust this to a fund manager, who then invests it. The pooling of funds
allows more people, especially those who may not have large amounts to invest
or are afraid to invest alone, to own bonds and stocks.
Bonds are IOUs issued by governments or corporations, while stocks are
certificates of partial ownership in a corporation.
Mutual funds and hedge funds can invest in publicly traded stocks and bonds
in any corporation or government anywhere in the world.
A professional fund manager’s job is to make the fund earn a higher return
compared to what investors themselves could do on their own. By using his
knowledge of the financial markets and how various events like hurricanes,
wars, and climate change affect companies and governments, he should be able to
increase the fund’s value.
In exchange for his work, the fund manager collects a fee that is a small
percentage of the total value of the investment fund.
The company selling the mutual or hedge fund prepares a prospectus, a
document describing the fund’s management, investment strategy, risks, and
costs. The prospectus may include the manager’s performance, comparing this
with similar funds in the market.