Weighing the Benefits and Downsides of Mutual and Hedge Funds

by John Stevenson on May 7, 2014

Mutual and hedge funds offer multiple benefits, but the risk must be carefully assessed as well. Mutual funds offer benefits such as fair pricing and dividend reinvestment, but there are downsides such as higher sales charges, hidden fees, and others. Hedge funds also offer benefits such as comparatively lower leverage and higher liquidity, but there are risks and disadvantages such as transparency and liquidity.

Benefits and Downsides to Consider

The main benefits of hedge funds include portfolio diversification, capital preservation and growth, and reduced risk of losses. Hedge funds offer downside protection meaning that they help improve the customer’s return and risk profile. There are disadvantages to investing in hedge funds as well, including the lack of risk management, management selection bias, high minimum investment requirements, and others. The fact that these funds are subject to low regulation means that some managers use unfair practices. Managers take more risk to improve performance because their fees are also based on the manfund’s performance and returns. When it comes to mutual funds, there are pros and cons to consider as well. Mutual funds come in different varieties and invest in money market instruments, bonds, stocks, and other investment vehicles. The fact that funds pool money from different investors and often invest in diverse assets minimizes risk and leads to portfolio diversification. Other benefits to investing in mutual funds include quality investing, liquid investment instruments, and a selection of fund types and flexible solutions. The fact that there are no sales commissions or transaction fees makes mutual funds popular with investors. They also allow subsequent investments and invest in different asset classes, which translates into automatic improved diversification. When looking into mutual funds, investors take into account factors such as risk-to-return, performance, investment solutions, and others. In some cases, adjustments are made to minimize the risk of loss and improve performance. Whether to invest in mutual funds depends on your investment goals – to grow your savings, save for retirement, or anything else. Some downsides to consider include the risk of poor performance, trading limitations, and inefficiency. Other problems that managers cite include size and the fact that funds are not insured against the risk of loss. What is more, customers are faced with too many choices given that there are thousands of mutual funds to choose from.

Choosing an Investment Vehicle

Besides mutual and hedge funds, investors have plenty of solutions and schemes to choose from, including high-interest savings accounts, certificates of deposit, Forex trading, and others. There are other types of investments such as contracts for difference, structured deposits, real estate investment trusts, exchange traded funds, traded life policies, bonds, and many others. When choosing an investment instrument, whether investment-linked insurance policies or hedge and mutual funds, look at factors such as regulatory policies and environments, risk management, and others. Make sure you consider the costs, fees, limitations, amount required, and other factors.

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