The main difference between a brokerage account and a mutual fund is in 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 held in brokerage accounts.
It is important for new investors to learn the main differences and similarities between mutual funds and brokerage accounts prior to investing. Each approach to investing offers its own advantages as well as disadvantages. The following will help to better understand and choose the best approach that is right.
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.
What are Mutual Funds?
Mutual funds are collective investment securities. They group together 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 type of assets. For instance, 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, it is important that investors have a full 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 important 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 have the ability to offer a wide diversification, meaning an investor can hold multiple types of securities in each investment approach. Although, the diversification range is decided by the investor. A brokerage account provides investors the option to hold various types of securities, but it is up to him/her 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 as well, but there are some that are passively managed, including index funds.
Difference between the mutual fund and brokerage account
The following differences will help determine which investment approach will work the best.
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 the form of investment minimums. Depending on the broker used, the minimum can range greatly, from $50 to more than $5,000.
Functionality
This could be the largest difference between the two types of accounts, and a key deciding factor, how they function.
Brokerage accounts are accounts which hold the 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.
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, there will be additional fees attached to mutual funds, including called loads with a sales charge, or there are options for no-load funding without a sales charge. Although, there will be an ongoing cost for every mutual fund as detailed within the expense ratio of the fund, 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 clearly have two different purposes and uses. Whereas, the brokerage account is used for holding all the investments. Meanwhile, mutual funds are an investment on their own.
However, investors are able to hold mutual funds within his/her brokerage account for easy portfolio management.
Wanting 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 approach is directly investing within a no-load, low-cost mutual fund company, such as Fidelity or Vanguard.
