What Is the Difference Between Managed & Mutual Funds
- A mutual fund allows for many investors to pool their money into a specific investment strategy, such as large company stocks, real estate investment trusts or bonds, and receive a proportional share of the profits (or losses) of that strategy. You can find a mutual fund for almost every conceivable investment strategy, including bear market funds (that is, the mutual fund value goes up when the stock market goes down), commodities funds or funds that invest according to particular religious values.
- Mutual funds don't allow you to control your capital gains taxes.tax forms image by Chad McDermott from Fotolia.com
When you buy shares of a mutual fund, you entrust your money to a team of portfolio managers to invest. You do not own the underlying securities in the fund, and you have no say about what gets bought and sold, although you can sell your shares at any time, after an initial holding period is met. Since the fund company must distribute dividends and capital gains to shareholders, you cannot control your potential tax liability, except by choosing funds committed to tax efficiency. - Like a mutual fund, a managed account provides a specific investment strategy that may be used by many different investors. A managed account strategy, however, as indicated earlier, allows the investor to own the underlying securities outright, giving her control over her assets. As a result, even though a particular strategy may be followed by many different investors, no two managed accounts will look the same.
- When you buy a managed account, you entrust your assets (you can fund a managed account with both cash and stocks) to a team of portfolio managers to invest. However, unlike a mutual fund, you can actually see the securities in your account, and you have some say over which of them will be purchased and sold. This allows you to influence your potential tax liability and control your individual stock ownership, ensuring that you won’t own stocks that you don’t like or can't own because of your job or other conflicts of interest.
- Investors can benefit from both types of strategies.fishing image by Ni Chun from Fotolia.com
Managed accounts best serve investors in high tax brackets or who hold appreciated stock that they want to liquidate over time. Most managed accounts require high investment minimums, generally no less than $100,000. By contrast, mutual funds can best benefit investors with little capital to invest or who needn’t worry about taxes. Though managed accounts can cost more to manage than mutual funds, your higher costs could be more than offset by your potential tax savings. See References and Resources for more information about managed accounts versus mutual funds.
