Investing in mutual funds online is one of the staple methods of creating wealth and ensuring financial security in India. You can start a SIP (Systematic Investment Plan) or invest in a lump sum. However, as a high-net-worth individual, you may want to widen your investment horizon and explore other options. Hedge funds may be an excellent option for high-net-worth investors looking for high returns and diversification. Keep reading to know more about them in this detailed guide.
What are hedge funds?
Hedge funds are actively and aggressively managed funds that pool in money from several investors and invest it further, similar to different investors investing in mutual funds online. However, these funds typically take investments from high-net-worth individuals, endowments, banks, insurance, etc.
Similar to mutual funds, hedge funds invest in different asset classes, such as equity, debt, currencies, commodities, derivatives, and others. There are different types of hedge funds, such as offshore hedge funds, fund of funds, and domestic funds. Each of these uses unique strategies to invest in the market. These include long and short selling, arbitrage, being market neutral, and more.
What are the features of hedge funds?
Here are some features of hedge funds:
- They are ideal for high net-worth investors:
As mentioned above, hedge funds can be ideal for high net-worth individuals. These have a minimum ticket size of Rs. 1 crore and may not fit in an average investor’s budget.
- They offer great diversification:
Hedge funds have a wide range of underlying securities that ensure optimal diversification. They have a rich portfolio of different asset classes like real estate, equity, debt, currencies, money market instruments, derivatives, and more.
- They can carry high risk:
Hedge funds can have a long lock-in period. So, they are low on liquidity. Moreover, since they invest in several high risk securities, they are suitable for investors with a high risk appetite only.
- They are taxed differently than mutual funds:
When you invest in mutual funds online, you pay tax as long-term and short-term capital gains. These are different for equity and debt funds. However, the government has not yet announced a tax structure for hedge funds. As a result, they are taxed at the investment fund level and not passed into the hands of the investors.
- They can offer extreme returns:
With high risks comes the possibility of earning relatively higher returns. However, hedge funds can be extremely volatile and can fluctuate throughout the course of the investment.
To sum it up
Hedge funds can offer an advantage over a regular SIP in a mutual fund. However, they are only suitable for high-net-worth and well-experienced investors. New investors may find them too complex, and someone with a low investment budget would not meet the criteria to invest in them. However, if you fit the bill and wish to explore them, you can head on to download the Tata Capital Moneyfy App, browse through the many options, and start investing in the funds of your choice.