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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.
Before investing, new investors need to learn the main differences and similarities between mutual funds and brokerage accounts. Each approach offers advantages and disadvantages. The following will help them better understand and choose the best method.
What are Brokerage Accounts?
Brokerage accounts are utilized when an investor decides to buy, hold, or sell securities (stocks, bonds, etc.). There are a couple of ways the investor may open brokerage accounts. Conventionally, they can use a full-service firm or an online broker. Furthermore, a brokerage account can have two types of ownership: individual or joint.
Is a brokerage account an investment account?
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 assets from various investors to build a single portfolio managed by a professional. Additionally, a mutual fund can invest in cash, bonds, stocks, or a mix of these types of assets. One way to remember a mutual fund is like a bucket holding anywhere from a few holdings to hundreds.
Brokerage Account
Structure:
- A brokerage account is an account you open with a brokerage firm to buy, sell, and hold investments.
- It acts as a holding account where you can manage various investments such as stocks, bonds, ETFs, mutual funds, and other securities.
Ongoing Fees:
- Brokerage accounts may charge trading commissions, account maintenance fees, and margin interest if you borrow against your investments.
- Many modern brokerage firms offer commission-free trading for stocks and ETFs, though other fees may apply.
Opening Costs and Minimums:
- Some brokerage accounts have low or no minimum opening balance requirements.
- The costs to open a brokerage account are minimal, but initial deposit requirements vary by firm.
Flexibility:
- Brokerage accounts offer significant flexibility, allowing you to buy and sell various securities at your discretion.
- You can make individual investment choices and tailor your portfolio to your financial goals and risk tolerance.
Mutual Fund
Structure:
- A mutual fund is an investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
- It is managed by professional portfolio managers who make investment decisions on behalf of the investors.
Ongoing Fees:
- Mutual funds charge annual fees known as expense ratios, which cover the fund’s management and operation costs.
- Some mutual funds also have additional fees, such as sales loads, which are commissions paid when buying or selling fund shares.
Opening Costs and Minimums:
- Mutual funds often have minimum investment requirements ranging from a few hundred to several thousand dollars.
- Initial investment costs vary depending on the fund and the share class you choose.
Accessibility:
- Mutual funds provide easy access to a diversified portfolio without the need for individual security selection.
- They suit investors who prefer a hands-off approach, as the fund managers handle all buying and selling decisions.
Key Differences
- Account vs. Investment Vehicle:
- Brokerage Account: A holding account for various types of investments.
- Mutual Fund: A pooled investment vehicle that can be held within a brokerage account.
- Flexibility and Control:
- Brokerage Account: Offers flexibility and control over individual investment choices.
- Mutual Fund: Provides professional management and diversification but less individual control.
- Fees:
- Brokerage Account: May have trading commissions and other fees.
- Mutual Fund: Charges annual expense ratios and possibly sales loads.
- Minimum Investment:
- Brokerage Account: Often low or no minimum balance requirements.
- Mutual Fund: Typically has minimum investment requirements.
In summary, a brokerage account is an all-encompassing account that holds various investments. At the same time, a mutual fund is a specific type of investment within a broader portfolio that can be held in a brokerage account. Each serves different purposes and caters to different investor needs and preferences.
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 completely understand them.
Below are the main similarities:
Taxation
While taxation is slightly different between mutual funds and brokerage accounts, there are some significant similarities to know. First, 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 investor decides on the diversification range. 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 can be narrowed or greatly diversified. Therefore, investors can invest within a single mutual fund or several.
Professional Management
When a brokerage account is bought from a full-service brokerage firm, there is typically an option to have the account(s) managed by a professional. This allows 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 differences between brokerage accounts and mutual funds are:
- Brokerage accounts enable you to buy and sell investments; while mutual funds are not accounts, they are investments.
- 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 expected to have an upfront cost in investment minimums. Depending on the broker used, the minimum can range significantly 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 in how they function.
Brokerage accounts hold investments 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 come from a 401(k), IRA, brokerage account, variable annuity, or 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 related to trading costs, including commissions or transaction fees. When going through a broker, the commission rates are usually higher than if the investor uses 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 uses. At the same time, the brokerage account is used for holding all the investments. Meanwhile, mutual funds are investments on their own.
However, investors can hold mutual funds within their brokerage a account or for easy portfolio management.
Do they want investment flexibility that allows for various security types? Opening a brokerage account may be the best approach. If minimums are not an issue, the best process is directly investing in a no-load, low-cost mutual fund company, such as Fidelity or Vanguard.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
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