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Stone Cao:

Mutual funds. You've probably heard the term, and maybe Separately Managed Accounts as well, or SMAs. But what are they exactly? Let's start with mutual funds.

Mutual funds pool money from many different investors and invest that money in stocks, bonds, or other assets. When you invest in a mutual fund, you don't own shares in the fund's individual investments directly, but you own shares in the mutual fund itself. The price you pay for each share of the fund reflects the value of all of the fund's investments divided by the total number of shares in that fund. This is known as the Net Asset Value, or NAV.

So why would you invest in a mutual fund? There are a few reasons. One, they are professionally managed. Skilled fund managers do all of the work of researching, buying, monitoring, and selling the mutual fund's investments.

Two, mutual funds provide a convenient and cost-effective way to diversify your investments. Basically, it's an easy way to gain exposure to many different securities. There are also many different types of mutual funds. Some are designed to be safer, some more aggressive and risky.

There are funds that focus on bonds, funds that focus on stocks, and balanced funds that combine the different types of investments. There are index funds, which track the performance of a specific index, like the S&P 500, and even specialty funds that invest in real estate or commodities, for example, or that focus on companies that support environmental stewardship and human rights. Mutual funds are a great way to diversify your investments, to avoid the risk of placing all of your investment eggs in one basket. But like any investment, the value of a mutual fund's shares can go up or down.

Hopefully up. It's important to understand the fund's objectives and the types of securities it's buying before you invest.

Now that we've discussed mutual funds, let's turn to separately managed accounts. Like a mutual fund, an SMA is a professionally managed pool, or portfolio, of assets.

The big difference, however, is that the individual securities are owned directly by you and not a mutual fund. Each portfolio is unique and designed for a specific individual investor. For example, a manager may manage a mutual fund and also offer a separately managed account that invests in the same stocks. The decisions the manager makes for the mutual fund will impact all of the mutual fund shareholders in the same way.

In a separately managed account, though, there is more customization. The manager may decide to make different decisions around the timing of buying and selling shares or about the dividend reinvestments or distributions. Or the investor may want to ensure the portfolio doesn't invest in tobacco or alcohol stocks, for example. Separately managed accounts allow one investor's account to vary from another's.

So there you have it mutual funds and Separately Managed Accounts, or SMAs. They share many similarities. Both offer professionally managed pools of investments and the potential for portfolio diversification. But there are some key differences in terms of what you own, either a mutual fund's shares or direct ownership of stocks and other assets, and the amount of customization that's possible.

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