Mutual funds are among the most common approaches in the investment industry. In this investment tool, the capital is pooled from different investors. The money is then used to buy securities like stocks and bonds.
On the other hand, separately managed accounts (SMA), as defined by Alpha Wealth Funds, is a “portfolio of individual securities managed by financial professionals.”
If you are a newbie in the business and planning to invest, or a longtime player looking to improve your portfolio, it’s time you considered placing your money in separately managed accounts.
Ownership of Investment
Mutual Funds. In this approach, you don’t own the securities. You own only a part of the funds, which in turn, own the securities. The rest of the funds are scattered among a diverse group of investors.
SMA. If you invest via SMA, you directly own the securities. The money manager has the discretion to make decisions for your specific investment, without having to consult other investors.
Selling of Investment
Mutual Funds. Because the funds are bundled, you cannot strip your share from the pooled funds. This means that you cannot sell the funds even if they are under-performing.
SMA. You can sell your funds as you wish because you are the sole owner. If there is a loss, and you decide to sell the funds, you can benefit from tax loss harvesting. In addition, funds in SMA are highly liquid.
Management of Investment
Mutual Funds. Money managers have to juggle between watching the progress of securities, competing with other managers in the same market, and managing the accounts of different investors. In essence, their focus is divided among the demand of each investor.
SMA. You have sole ownership of the account, and the manager bases his decision on your preference. Meaning, you can sit with your manager to customize your portfolio.
In any case, whether you put your money in mutual funds or SMAs, it is wise to have someone manage your investment closely. Money managers are trained and certified. They know their way around the labyrinth of the investment business. However, if you want your manager to center on making your money work harder, the SMA approach is better. Besides, SMAs are known to give an impressive performance.