Is a Roth IRA a Mutual Fund?
A Roth IRA is not a mutual fund. The main difference in the two is that one is a professionally managed pool of securities (mutual fund) in which investors purchases shares, and the other (Roth IRA) is a retirement account from which the owner can purchase different types of securities.
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Defining Mutual Fund
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In a mutual fund, investors purchase shares to benefit from a professionally managed group of stocks and bonds, also known as a basket or portfolio. The manager buy or sells securities to try and increase the return for investors. The investor benefits from the diversification, holding many different stocks or bonds without having to individually purchase each.
Types of Mutual Funds
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Value funds, money market funds, index funds, and international funds are just a few other types of mutual funds. There are many types of mutual funds. Which the investor chooses depends on his goals and risk tolerance. Exchange traded funds (ETFs) seek to mirror the performance of specific market indexes, such as the Dow Jones Industrial Average. Bond funds are lower risk; growth stock funds are moderately risky with the potential for higher rewards.
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Defining Roth IRA
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A Roth IRA is an individual retirement account in which an individual purchases securities in order to accumulate income for retirement. In order to achieve a desired level of return, or gains over a period of time, the investor may purchase stocks, bonds, mutual funds or an annuity.
Comparison of Mutual Funds and Roth IRAs
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The only similarity between a mutual fund and a Roth IRA is that both allow the investor to own a portfolio of stocks and bonds. Using a Roth IRA means the investor creates the portfolio on his own, whereas a manager creates the mutual fund. The financial institution in which the person opens the Roth IRA usually charges flat fees for buying and selling stocks. The mutual fund charges management fees, usually as a percentage of dollars invested. Growth in a mutual fund is useful for any purpose the investor chooses but a Roth IRA is solely designed to generate income for retirement.
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