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Understanding the difference between Brokerage Accounts and Mutual Funds – Which One to choose?

Understanding the difference between Brokerage Accounts and Mutual Funds – Which One to choose?
By Ajita Jha
Key Takeaways 
  • A brokerage account is an investment account that is used to buy bonds, stocks, mutual funds, and more. 
  • A mutual fund consists of a pool of money collected from various investors to invest in bonds, stocks, and the likes. 
  • Both mutual funds and brokerage accounts provide access to diversified and professionally managed services.
  • The structure, initial fees, and ongoing costs of mutual funds and brokerage account considerably vary.
 
Brokerage Account 
A brokerage account is an account that is used by investors to sell, buy, and possess securities, such as bonds and stocks. A brokerage account can be opened through an online discount broker or a traditional full-service brokerage firm. Acquisition of brokerage accounts can be on an individual basis or a joint basis. 
 
Mutual Funds  
Mutual funds are collective investment security that includes assets of various investors into one officially organized portfolio. Mutual funds can invest in bonds, stocks, cash, or a combination of these assets. In this manner, mutual funds are like a container of assorted holdings. To know more about Mutual Funds you can go through our detailed blog on our website An introduction to Mutual Funds.
 
The Similarities between Brokerage Accounts and Mutual Funds 
There are certain similarities between brokerage accounts and mutual funds which investors must be aware of before making an investment. 
Features
Brokerage Accounts
Mutual Funds
Diversification
It can hold multiple types of security. However, the level of diversification is decided by the investor. 
It can also be widely diversified. Investment in one or multiple mutual funds solely depends upon the investor. 
 
Taxation
Dividends and interests are taxed as usual income. Investors have to pay taxes for capital gains.
There is little to no difference in taxation. But, in this also, dividends and interest are taxed as usual income. 
 
Professional Management
Brokerage Accounts can be professionally managed if you purchase through a full-service brokerage firm.
Mutual funds can be managed professionally, however, some of them are passively-managed funds, like index funds. 
 
 
The Main Differences between Brokerage Accounts and Mutual Funds 
It is very important to know about the main differences between the two to finally decide the best investment vehicle for yourself. Given below are the key differences between brokerage accounts and mutual funds: 
Features
Brokerage Account
Mutual Funds
Functionality and Purpose 
Brokerage accounts are not investments. They are accounts that keep the investment. 
Mutual funds are not accounts and they do not keep securities. The investor has to buy the mutual fund inside an account that can also be a brokerage account or a variable annuity or a mutual fund company. 
 
Initial Fees
You can open a brokerage account without any initial costs or fees. 
 
In mutual funds, there is a minimum initial fee or investment ranging from as little as $100 going up to $3000 or more. 
 
Ongoing Costs 
The ongoing cost of brokerage account includes trading costs such as commissions or transaction fees. You can use a discount broker to avoid higher commissions on a regular broker. 
 
Mutual funds can include sales charges, which are called loads. No-load funds are also included with no sale charges. Although, all mutual funds contain ongoing expenses that come in the fund's expense ratio. 
 
 
 
Bottom Line
When it comes to deciding between brokerage accounts and mutual funds then both of them have their own advantages and setbacks. A brokerage account is a vehicle that holds investments whereas mutual funds are investments themselves. If you are looking for the flexibility of investing in various types of security, then a brokerage account will do the job for you. However, if you prefer to invest in mutual funds then choose a low-cost, no-load mutual fund company. Also, to get a better insight, you can always check the reviews and experiences of people at BankQuality and reach a meaningful conclusion before finally spending your hard-earned money.