Question

Explain the differences between a mutual fund, an exchange trade fund (ETF), and a hedge fund.

Answer 1

The differences between a mutual fund, an exchange trade fund (ETF), and a hedge fund are as follows:

a) Meaning - Mutual fund is a pool of funds collected from investors to invest in financial instruments.An Exchange Traded Fund is an investment fund which is traded on the stock exchange, it is a marketable security which tracks a commodity, bond or an index.A hedge fund is an alternative investment which is designed to protect investment portfolios from market uncertainty, while generating positive returns.

b) Liquidity - The liquidity is high for mutual funds and ETF's and low for hedge funds.

c) Return- There is relative return for mutual funds and ETF'S and absolute return for hedge funds.

d) Regulation - A Mutual fund is regulated by SEBI (Securities and Exchange Board of India). Whereas an ETF is regulated by Securities and Exchange Commission, hedge funds face less regulation. So, depending on the amount of assets in the hedge funds advised by a manager, some hedge fund managers may not be required to register or to file public reports with the SEC.

e) Type of Investor - A mutual fund and an ETF is used by retail investors and a hedge fund is used by high net worth investors.

f) Management - Mutual funds are Comparatively less actively managed, ETF's are Passively managed and Hedge funds are actively managed.