People who are not institutional investors have at least two opportunities for investing in the stock market. They have the choice of mutual funds or the separately managed accounts. They are, however, two very different types of accounts. One will suit the needs of people more than the other, and they require that people diligently study how they both work.
The Mutual Fund
The mutual fund account solved a problem for a lot of people. Investing in the stock market was a desire of those who did not have unlimited funds to spare, but they would like to enjoy the benefits the stock market could offer them. With the invention of the mutual fund, those with a smaller amount of money to invest could participate in the purchase of stocks and bonds.
With mutual funds, people do not need to purchase their stocks and bonds individually with accounts containing hundreds of thousands of dollars. Mutual funds allowed them to pool their money with several other people in which they will all buy a number of shares in the investments. A money manager will be the one who will guide the money invested in the mutual fund account into the most appropriate investment vehicles, and this money manager will continue this activity all the while that the client has money invested within it.
How People Earn Money through Mutual Funds
Placing money in a mutual fund account offers people several ways in which they can gain a return on their investments. One is through the dividends that people receive from their stock purchases. When people purchase stock, they are actually buying a small portion of a company. They are entitled to receive a portion of the revenue that the company earns commensurate of the amount of their shares. These are the dividends.
A mutual fund that is invested in bonds will earn interest. The money that the investors loan to a particular company will require that the company pay interest every six months until the bond matures. These bonds have an extremely wide range of maturity dates, and they can be as short as three months or as long as 30 years.
When the mutual fund is sold, this gives the investor another way in which to earn money. What people prefer when it comes time to sell a mutual fund is that the purchase price will be higher than the one they paid for it. If this is the case, they receive a profit, known as the capital gain. In the event that the shares show a profit but they are not being sold, the investors can still benefit because the increase will be added to the investors’ accounts.
Separately Managed Accounts
Separately managed accounts, also known as the SMA, are similar to the mutual fund accounts in that they are highly diligently managed by one or more money managers. The main difference is that the SMA does not contain several people that put their money together to purchase the stocks or bonds. These are individually managed accounts for people who have more money to invest than those who favor mutual funds but not as much as the large investment firms. Each SMA will be managed separately with different decisions being made for each different account.
How the SMA and Mutual Funds Are Different
Mutual funds are being described as an investment vehicle that does not require the investors to be involved in any of the decisions pertaining to the account. The SMA is exactly the opposite. The investor can work as closely with the money manager as he or she desires in deciding where the money will be invested and when the positions will be bought and sold. Those who would like this type of control would enjoy the SMA much more than the mutual fund.
One main benefit of the mutual fund was the fact that it did not require people to have tens of thousands of dollars to invest. The SMA does require a little more money for the privilege of enjoying more involvement in the investment process. Typically, these accounts begin with $100,000, but these accounts are capable of accepting $5 million. The SMAs are an alternative for those who are not part of the very large institutions that ask for $25 million to begin investing in stocks and bonds.
With mutual funds, fees are illuminated very clearly in the prospectus so that everyone knows exactly what they will be before they determine that they will invest in the fund. With the SMA, the fees will be a little bit more difficult to determine because those thinking of investing in them will not have a prospectus to consult. Like with a lot of features associated with the SMA, the fee structure can be individualized. This means that each money manager may charge very different fees than another.
Before Deciding on a Money Manager
The major difference between the mutual fund and the SMA is that those who wish to find the right money manager will have to put in extra effort to do so. Mutual funds that have a prospectus attached give out in depth information on the fees and several other important pieces of information that people need to know to make an informed decision. The SMA that does not have a prospectus requires that potential investors study each particular money manager’s investment strategy to discover if it is something that they can agree with.Mutual Funds vs Separately Managed AccountsThe mutual funds and separately managed accounts are targeting two very different groups of people. Mutual funds make investing in the stock market for those who do not have a lot of money or expertise in this area possible. These accounts have active money managers that devote themselves to directing the funds without the participation of the shareholders.In contrast, the SMA is for people who are completely the opposite but do not have the $25 million dollars to invest that other types of accounts require. These accounts are for people who want to work closely with their money managers helping to make the decisions with at least $100,000.Calrima Financial & Insurance Agency – we have been assisting people in our community in a variety of ways for over 20 years. identify, isolate and help eliminate financial issues that could impact your future. By addressing these issues you’ll have peace of mind regarding your financial future.
As a fee based Advisor we are able to render second opinions to confirm what you are doing is appropriate for you or simply expose red-flags you need to address with your Advisor.
When your current Advisor took the time to review exactly what recommendations were made and how they will protect your future – how was that process for you? It might not be that important as you can always scale back later in life or return to the workforce.
Our initial consultation is complementary – would a second opinion ever be a waste of your time?
Sources:
http://www.investopedia.com/
http://www.investopedia.com/
http://mutualfunds.about.com/