The Difference Between Mutual Funds & Separately Managed Accounts

Mutual funds and separately managed accounts can offer attractive investment returns.
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Mutual funds and separately managed accounts are ways to diversify your portfolio in a single investment. Both involve investing pools of money over a range of investments, and both are run by professional managers. However, the investment structures of these strategies differ greatly, as do the fees. Separately managed accounts used to be available only to fabulously wealthy investors. Nowadays, most brokerage houses offer access to separately managed accounts for much smaller investment minimums.


Whether you invest in mutual funds or separately managed accounts, your money is buying the investment services of a professional money manager. With a mutual fund, you buy shares in the fund itself, each representing a certain percentage of the value of the fund as a whole. With a separately managed account, you own actual securities in your account.

The manager of a separately managed account will take the money you invest and place physical shares of stock and other investments in your account in proportion to the amount of money you put in. If you want to sell an individual stock, you can ask the manager to do so, something you can't do in a mutual fund.


Mutual funds are classified by investment objective and risk tolerance. For example, you can buy a mutual fund with an aggressive growth profile if you want to own volatile stocks, or you can buy a conservative income mutual fund if you prefer safer, steady investments such as Treasury bills. When you buy a particular fund, you own the same stocks as every other investor in the fund.

With a separately managed account, your portfolio may be unique. If you there are certain stocks you don't want to own, such as tobacco stocks, the manager can eliminate those from your portfolio. While your manager will tailor your portfolio based on your investment objective and risk tolerance, you will not own the same set of securities as most other investors.


A mutual fund has the edge over separately managed accounts when it comes to convenience. You can buy or sell most mutual funds whenever you like, although there may be fees involved. With a separately managed account, you typically have to complete a questionnaire before you invest, and your portfolio manager may take a few days to get your money fully invested. Some managers allow the liquidation of managed accounts only at certain times.


By law, mutual funds must pay out income and capital gains to investors, which is a taxable event. Even funds that go down in value can pay out capital gains to shareholders, if the manager sold winning stocks during the year and kept his losers. With a separately managed account, you can ask a manager to be as tax-efficient as possible and to try to offset gains and losses in the account, leaving you with no tax liability. With a mutual fund, you are at the whim of the portfolio manager.

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