What Is a "Separate Account" Vs. a "Mutual Fund"?


Mutual funds are investment vehicles that pool the funds from many different investors to buy the assets of the fund. Investors in mutual funds own shares of the fund, not the underlying assets. Separate account management by an investment manager is similar in fashion to mutual funds, but the investor directly owns shares of the underlying assets.

Separate Accounts

Separate account management is by investment professionals with expertise in a particular investment arena. Separate account investment focus is possible on any type of investment, such as stocks, bonds, mutual funds or commodities. Investment focus can also drill down even further into investment classes, such as large, small or mid cap stocks, and short-, intermediate- or long-term bonds. Even though the investments have professional management, the investor owns the underlying investments in the fund and can check on the price of individual securities held at any time throughout the business day when financial markets are open.

Mutual Funds

There are many different types of mutual funds available in the financial markets. A mutual fund has a stated investment focus like a separate account, and mutual funds can be purchased for more sub-classes of investments than separate accounts. For example, mutual funds are available that invest in precious metals, drilling and mining exploration. Pricing of a mutual fund cannot be determined during normal market hours, as the price is determined at the close of the market when all closing prices of the underlying securities have been determined. This closing price is the net asset value of the fund, and determines the value of each share that an investor owns.

Separate Account Governance

Investment managers that manage more than $25 million in client assets must register with the Securities and Exchange Commission which has a website with a search option to find information on an investment manager. The website contains Form ADV information, which is the basic information an investment manager is required to file with the SEC. It is critical to thoroughly research a separate account manager prior to investment, as separate account managers do not have the same public disclosure rules as mutual fund companies (remember Bernie Madoff).

Mutual Fund Governance

Mutual fund governance is by the Investment Company Act of 1940, which places certain restrictions on activities the mutual fund may engage in. Mutual funds governed under the Act must register with the SEC, and the Act restricts activities such as short-selling. The Act further requires regular public financial disclosures, and places limits on the fees the fund can charge. As with any investment, it is crucial to perform research on the fund prior to making any investment. The SEC offers an informative publication on mutual fund basics that is a good read for any investor seeking to invest in mutual funds.

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