In jungle lions usually hunt alone while wolf attack in groups in case of financial markets also there are lions called private equity investor and wolfs called mutual fund investor who invest differently in financial markets. Private equity and mutual funds are the terms used in the context of financial markets and many people get confused between both the terms as both terms imply investing money into the companies so as to profit from investing. However, they both are different in various aspects and one should read below differences between private equity and mutual funds in order to clear all doubts about both the terms –
Differences between Private Equity and Mutual Funds
Meaning
Private equity refers to investment done by individual or group of individuals into shares of those companies which are not listed in the stock market for trading while mutual fund refers to that fund which is professionally managed and it pool money from large group of investors and from that fund it purchases stocks of listed companies.
Risk and Return
In case of private equity risk factor is high because companies are unlisted and they may or may not turn out to be successful. If they turn out to be successful than private equity investors will earn great returns by listing it on stock exchanges, however, if it turns out to be unsuccessful than it can lead to big losses for the investors. However in case of mutual funds risk is not as high as private equity because mutual funds invest money into listed companies which have proven record of success besides risk in case of a mutual fund is diversified as they invest into many companies and not in one company which is the case with private equity.
Small group of Investors VS Large group of Investors
In case of private equity numbers of people who have invested into the private equity of the company are few usually the number of such investors is between 2 to 20 while in case of mutual funds the number of people who have invested into the mutual funds is large and it can be anywhere from 100 to 100000. Hence mutual fund will always have a larger group of people investing in it as compared to private equity where the group of investor will always be small.
Amount of Investment
The amount of investment involved of the investor in private equity will be very large while in case of the mutual fund the amount required for investment is small. Hence an investor cannot invest $100 or $1000 monthly into private equity but in case of mutual funds, one can invest even $100 or $1000 monthly. In simple words, one needs to have a large chunk of capital if one is thinking of going for private equity which is not the case with mutual funds.
Type of Investors
In case of private equity, the major players or investors investing into private equity are high net worth individuals, large pension funds and group of sophisticated investors while in case of mutual funds players or investors investing into mutual funds comprises of small investors like retail investors who are looking for good returns over a period of time.
As one can see from the above that private equity and mutual funds are miles apart from each other as private equity is suitable for those investors who have a high-risk appetite and high capital while mutual funds are suitable for those investors who have low capital and are looking for a constant return from the markets.