What is the difference between a brokerage account and a mutual fund?
The main difference between a brokerage account and a mutual fund is structure, ongoing fees, opening costs, and minimums. Brokerage accounts are accounts that hold investments (they are not investments). Mutual funds are pooled investment securities, and they are not accounts. Mutual funds can be stored in brokerage accounts.
New investors need to learn the main differences and similarities between mutual funds and brokerage accounts before investing. Each approach to investing offers its advantages as well as disadvantages. The following will help to understand better and choose the best method that is right.
Table of Contents
What are Brokerage Accounts?
Like we see, Brokerage accounts are utilized when an investor decides that he/she wants to buy, hold, or sell securities (stocks, bonds, etc.). There are a couple of ways the investor may open brokerage accounts. Conventionally, he/she can use a full-service firm or with an online broker. Furthermore, a brokerage account can have two types of ownership: individual or jointly.
Is a brokerage account an investment account?
Yes, a brokerage account is an investment taxable account that allows you to buy and sell various assets, such as stocks, bonds, mutual funds, currency pairs, cryptocurrencies, indices, and ETFs. Investors can transfer money from a private bank account to a brokerage account whenever they want.
What are Mutual Funds?
Mutual funds are collective investment securities. They group the assets from various investors to build a single portfolio managed by a professional. Additionally, a mutual fund can be used for investing in cash, bonds, stocks, or a mix of these types of assets. One way to remember a mutual fund is similar to a bucket holding anywhere from a few holdings to hundreds.
What are the similarities and differences between a brokerage and a mutual fund?
Although different types of investments, mutual funds, and brokerage accounts still have several similarities. While they may be subtle, investors must have a complete understanding of them.
Below are the main similarities:
Taxation
While the similarities of taxation are slightly different between mutual funds and brokerage accounts, there are some significant similarities to know about. First, any dividends and interest are taxed like regular income. Additionally, capital gains are taxed as well.
Flexibility and Diversification
Both mutual funds and brokerage accounts can offer broad diversification, meaning an investor can hold multiple types of securities in each investment approach. However, the diversification range is decided by the investor. A brokerage account provides investors the option to have various types of securities. Still, it is up to him/them to diversify or not through multiple investment goals or asset types. Meanwhile, mutual funds have the option of being narrow or greatly diversified. Therefore, investors have the option of investing within a single mutual fund or several.
Professional Management
When a brokerage account is bought from a full-service style brokerage firm, there is typically an option to have the account(s) managed by a professional. Therefore, allowing an advisor to make recommendations or a broker to buy/sell the securities on the investor’s behalf. A mutual fund can be managed professionally, but some are passively managed, including index funds.
Difference between the mutual fund and brokerage account
Brokerage account vs. mutual fund
The difference between brokerage account and mutual fund are:
- Brokerage accounts enable you to buy and sell investments; while mutual funds are not accounts, they are investments themselves.
- Mutual funds can be held in brokerage accounts.
- Brokerage accounts do not have an initial fee, while mutual funds usually have an upfront cost in investment minimums.
- Future fees in a brokerage account and mutual funds are different.
Brokerage account vs. mutual fund Opening Minimums
When first opening brokerage accounts, investors do not have an initial fee. However, with mutual funds, it is common to have an upfront cost in investment minimums. Depending on the broker used, the minimum can range greatly, from $50 to more than $5,000.
Brokerage account vs. mutual fund Functionality
This could be the most significant difference between the two types of accounts, and a critical deciding factor, how they function.
Brokerage accounts are accounts that hold investments made in a single, easy-to-manage location. Meanwhile, a mutual fund is not an account but allows the investor to hold securities within another account. Securities within a mutual fund can be from a 401(k), IRA, brokerage account, variable annuity, even straight from a mutual fund company.
Brokerage account vs. mutual fund Future Fees
Depending on the approach used, the ongoing future fees may vary. For instance, brokerage account fees are mainly that of the trading cost, including commissions or transaction fees. When going through a broker, the commission rates are usually more than if the investor using a discounted broker. Meanwhile, additional fees are attached to mutual funds, including loads with a sales charge or no-load funding options without a sales charge. However, there will be an ongoing cost for every mutual fund as detailed within the fund’s expense ratio, usually averaging 1.00%.
Final Thoughts
When comparing the differences and similarities between mutual funds and brokerage accounts, it is easy to see how the two approaches are related but have two purposes and use. At the same time, the brokerage account is used for holding all the investments. Meanwhile, mutual funds are an investment on their own.
However, investors can hold mutual funds within his/her brokerage account for easy portfolio management.
Do they want investment flexibility that allows for various security types? Opening a brokerage account may be the best approach to use. If minimums are not an issue, the best process is directly investing within a no-load, low-cost mutual fund company, such as Fidelity or Vanguard.
