Managed Money vs. Mutual Funds

Mutual funds and managed money (synonymous with managed accounts) are quite similar -- professionally managed portfolios that include stocks, bonds or other securities. The primary difference between these two is ownership. Managed money is more personalized and individualized than mutual funds, in which the investors become part owners of an investment portfolio. Mutual funds are stocks or bonds owned by several fund investors, while managed money involves one investor, who is the investment’s sole owner.

Managed money offers greater control over taxes than mutual funds. Although you won’t entirely avoid realized gains and income distributions with managed money, you can give instructions to the person managing your portfolio to collect the losses in individual securities to offset some of your gains. To do this, it's important that you track gains and losses and coordinate with your portfolio manager closely.

Another advantage of managed money such as hedge funds is that the Securities and Exchange Commission lightly regulates it; therefore, it offers more flexibility in allocating its portfolios. Finally, with managed money, you can customize your portfolio more, because you own the underlying securities.

Managed money is generally not for do-it-yourselfers. If you're busy with other commitments, you may find it challenging to keep up with the market trends and to track your losses and gains. In addition, keeping close tabs on your portfolio manager can be a challenge, especially if you're not the only client.

What makes a mutual fund popular is its simplicity. You simply find funds that you believe in and invest your money with them. The fund managers will take care of investing in areas that they see fit. A mutual fund is the right choice for you if you have a 401k plan (a retirement plan sponsored through your company) or an IRA (individual retirement account) in which you are adding fixed amounts periodically. You cannot do that efficiently in managed money.

With mutual funds, you cannot control what the fund manager does to the portfolio, even if you can control when you buy and sell shares of a fund for a gain or loss. You may receive unwanted tax gains because of the annual distribution of at least 90 percent of the realized capital gains and dividend income to shareholders. You do not solely own the underlying securities; you only own shares of the pool of securities. Therefore, you cannot direct the fund manager solely.