Managed money and mutual funds are two different ways you can invest your money. On the surface, they seem pretty similar: Both involve private money managers investing your money in a variety of securities. However, managed money and mutual funds differ in terms of how they operate. Which one is more appropriate for you as an investor depends on a variety of factors, including your personal investing style, expenses and tax considerations.
The main distinction between mutual funds and managed accounts is the way that ownership is represented. When you buy a mutual fund, you are buying shares of the fund itself. Each share represents a percentage ownership of the collective investments of the entire fund. With a managed account, you have your own private investment account. When you give your money to the account manager, he buys securities on your behalf and deposits them into your account. You actually own shares in each individual security, rather than owning shares of a pool of investments as with a mutual fund.
Both managed accounts and mutual funds charge fees, but they are structured differently. With a mutual fund, expenses are taken from the collective pool of money contributed by investors. The costs of the fund are reflected in the share price. With a managed account, you'll typically be charged an annual fee. You can either pay the fee directly to the manager, or you can have her sell some of your individual securities to cover the cost.
When you buy a mutual fund, federal securities laws require that you receive a fund prospectus. The prospectus provides numerous details about the operation of the fund, including its investment parameters and restrictions. Typically, a mutual fund will be limited in the types of investments it may purchase, which aims to protect unsophisticated investors. A managed account usually operates with more freedom and often allows investor input. For example, if you decide you like the style of a particular manager but don't want to own any companies that produce tobacco, you can direct the manager to keep those types of investments out of your account.
Mutual funds are required by law to pay out income and capital gains to shareholders. Typically, a fund will make income distributions monthly or quarterly, with capital gains distributions coming at the end of the year. With a managed account, a manager can pick and choose which individual securities to sell to better manage the investor's tax burden. For example, if you inform the manager that you already have large capital gains for the year, the manager may sell certain securities at a loss to help you reduce your tax bill, because you can use losses to offset capital gains.
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