Differences Between Brokerage Accounts and Mutual Funds

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Brokerage accounts and mutual funds are both ways for you to put your money in securities such as stocks and bonds.

Perhaps the biggest difference between brokerage accounts and mutual funds is their structure. While brokerage accounts allow investors to buy investments, mutual funds are themselves investments.

Each has its pros and cons. Find out which one is best for you or if you may need both.

Key Takeaways

  • A brokerage account is an account that is used to buy, sell, and hold securities, such as stocks and bonds.
  • A mutual fund is a pooled security that combines the assets of many investors into one professionally managed portfolio.
  • Brokerage accounts are holding vehicles for investments, whereas mutual funds are investments themselves.

What Is a Brokerage Account?

A brokerage account is an account that is used by investors to buy, sell, and hold investment securities, such as stocks and bonds. They can be opened through a conventional full-service brokerage firm or through an online discount broker. Brokerage accounts can be owned by one person or jointly owned.

What Is a Mutual Fund?

A mutual fund pools the assets of many investors into one professionally managed portfolio. Mutual funds can invest in stocks, bonds, cash, or a combination of these assets. In this regard, mutual funds are like baskets that may have dozens or hundreds of holdings.

Similarities Between Brokerage Accounts and Mutual Funds

There are a few key ways that brokerage accounts and mutual funds are alike.

Diversification and Flexibility

Brokerage accounts and mutual funds can provide broad diversification, which means they can hold many types of assets and asset classes.

How much to diversify is up to the investor. For example, you may hold many security types in a brokerage account, but choose not to diversify across an asset class or investment goal.

Mutual funds can also be broadly diversified or narrowly concentrated. You may choose to invest in one mutual fund or many funds.

Taxation

Although the small details of taxation can vary slightly between brokerage accounts and mutual funds, they are alike in some ways.

Interest income, ordinary dividends, and short-term capital gains are taxed as ordinary income. You'll pay a lower tax rate on long-term capital gains and qualified dividends.

Professional Management

If set up through a full-service brokerage firm, brokerage accounts can be professionally managed, which means a broker or advisor can recommend, buy, and sell securities on your behalf. Mutual funds are also professionally managed. Though some mutual funds are actively managed, there are also passively-managed funds, such as index funds.

Differences Between Brokerage Accounts and Mutual Funds

There are also a few ways that brokerage accounts and mutual funds differ.

Structure

Brokerage accounts are not investments. They are accounts that hold investments.

Mutual funds are investments. They are not accounts. Although the funds do hold securities, you buy the mutual fund inside an account, which may be a brokerage account, an IRA, a 401(k), a variable annuity, or directly through a mutual fund company.

Opening Costs and Minimums

You can open a brokerage account with no startup costs or fees. If you want to buy a mutual fund, you may find you need to have a minimum initial investment. These are often in the range of $1,000 to $3,000, or even higher.

Ongoing Fees

Fees are often structured differently for brokerage accounts and mutual funds. For example, the fees for a brokerage account primarily consist of trading costs, such as transaction fees or commissions. If you use a broker, commissions are generally higher than if you do it yourself through a discount broker.

Mutual funds can have sales charges, called loads. There are also no-load funds that do not have sales charges. However, all mutual funds have ongoing expenses that are expressed in the fund’s expense ratio. The average expense ratio is around 0.45%.

Bottom Line

Comparing brokerage accounts and mutual funds is an “apples-to-oranges” comparison. They are related, but not at all the same thing. Brokerage accounts are holding vehicles for investments, whereas mutual funds are investments themselves. In fact, mutual funds can be held within a brokerage account.

If you want the flexibility of investing in multiple security types, you may want to open a brokerage account. But if you want to invest in mutual funds, it is often best to buy directly from a low-cost, no-load mutual fund company such as Vanguard or Fidelity.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.