Everyone likes to get the best possible return on investment (ROI) for every dime he puts at risk. Though, not everybody has the skill and time to conduct required research to find the finest investment options. As a result of this, people frequently look at Robo advisors or Mutual Funds to manage their hard-earned money for them. However, deciding between Robo advisor and mutual fund can be tricky because comparing a Robo advisor vs Mutual Fund is not a piece of cake.
In this article we will briefly look at the differences between Robo advisors and Mutual funds. We will also look at some Robo advisor advantages, and Robo advisor performance vs Mutual Funds.
I will also try to answer commonly asked questions like “Do Robo advisors manage more money than Mutual Funds?”, “are robo-advisors better than mutual funds” and so on
Quick table of differences between robo advisors and Mutual Funds
Primary difference between a Robo Advisor vs Mutual Fund is that Mutual funds are normally run by a human fund manager. On the contrary, a Robo advisor is managed and run by a software created by some investment cum technology team.
Both Robo advisor and Mutual Funds can be extremely beneficial for short and long term investments and for generating regular income. However, the question we seek to answer in this article on Robo Advisor vs Mutual Fund is whether one option is significantly superior to the other.
Let’s start with taking a quick look at what is a Robo Advisor, along with a brief introduction to Mutual Funds.
A Robo advisor is a tool that picks investment options based on preset algorithms. A Robo-advisor is a reliable digital financial service that utilizes technology to:
- collect information that investors provide about themselves, their return expectations and risk taking ability, as well as their current financial situation.
- automate investing based on the information collected as mentioned in the above point .
The term “Robo” is used to signify that almost all services are completely virtual. Gadgets and devices like Computers, Laptops, smartphones, and tablets are utilized to interact with you and your accounts, funds, and investments decisions.
Robo Advisors are Mutual Fund investment advisors that provide account management and advisory services but with far lower charges than usual investment advisory services provided by a human.
What is a Mutual Fund?
A Mutual Fund is a pool of funds (money) gathered from several investors, sometimes situated in different geographies.
Mutual funds are run and managed by human money managers – key difference between Robo Advisor vs Mutual Fund. These fund managers create the fund’s investment mission & strategy.
They also make the final decisions on which assets will be purchased and/or sold in line with the Mutual Fund theme and long term goal.
A Mutual Fund is a managed collection of investments that puts investor’s money in several financial instruments such as shares, bonds, commodities and so on. It can be purchased or redeemed by any investor on mostly all business days of the week at the fund’s NAV* (Net Asset Value).
* NAV of any fund is calculated by adding the difference between each underlying asset’s (shares, bonds etc.) current market value of the assets and liabilities.
Key differences between Robo advisor vs Mutual Fund
Following is the summary of key differences between Robo advisor and Mutual Fund, The green highlighted text signifies a positive impact while the red one denotes a negative impact.
|ROBO Advisor||Mutual Funds|
|Robo advisors take the investment burden of your shoulders by auto-calculating where and how much to invest||Mutual fund managers effectively make the investment decisions on an investor’s behalf, based on the MF’s theme.|
|An investor need not be investment-savvy. The robo advisor will choose the fund based on the questionnaire||An investor needs to at least decide which mutual fund to buy. A human advisor can assist in MF selection, though at a cost|
|Financial advice on your investment is almost FREE – but only based on answers provided in the questionnaire||Good financial advice on your investment is mostly chargeable – a human advisor will answer any questions|
|Robo advisors help you have a diversified portfolio by investing in various asset classes based on your investment goals.||Not all Mutual fund can diversify your investments by investing in numerous asset classes. MFs are bound by their underlying theme.|
|Robo advisors provide auto portfolio rebalancing in times of trouble, only if the algorithm is robust enough to detect it.||Mutual funds rebalancing is managed by professionals. If the world collapses, an intelligent fund manager will take immediate steps.|
|Robo Advisor investments can be redeemed partially or completely at the current value.||Only Open-ended Mutual Funds can be redeemed partially or completely at the current value.|
|Personalized financial planning by answers provided in the questionnaire||Personalized financial planning comes at a cost|
|Goal-based investing: Questionnaire to help determine your goal||Wide range of MF schemes available to meet personal self-defined goals.|
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Now, let’s look at the benefits, drawbacks and Risks of Robo advisors in detail.
Let’s look at a few Robo advisor advantages and disadvantages in detail.
Robo Advisors Advantages
An investor investing money in robo advisors gets the following benefits.
1. Robo tuned investing & rebalancing
When you open an account with a robo advisor, you need to answer a few questions to define your risk profile. The questions help the Robo advisor find your investing personality. It basically needs to know your return expectations and risk appetite to suggest ETFs and other funds for your portfolio. Then it gives you the option to buy/sell yourself or let the robo advisor do the transactions for you.
When you compare robo advisor vs mutual fund, you will notice that a mutual fund has a human manager.
A robo advisor provides your expert advice and superior execution using an advanced AI based algorithm.
A well diversified portfolio gives better returns in the long-term term. It certainly has far lower risk. A Robo advisor can have access to hundreds of underlying assets, thereby having an option to give you a well diversified portfolio.
Robo Advisor diversifies your portfolio across thousands of assets based on AI algorithms. A human Mutual fund manager on the other hand might not have the expertise or time to research hundreds of Securities, mutual funds, ETFs. He will look at only a few investment options, Mutual funds or ETFs and will invest in the best ones according to his research.
3. Trading without fear and greed
When you are investing with a robo advisor, you are not executing any orders yourself and you do not have to make any final decisions buying or selling of Securities. The robo advisor will give you a suggestion initially.
The best part about Robo advisor vs mutual fund comparison is the fact that a Robo advisor has no emotions.
However in a mutual fund, there are two types of emotions. One is that of the fund manager buying and selling the underlying asset, and the second is that of the mutual fund investor.
4. Investing expertise not needed
Robo advisors are the best choice for new or passive investors. They do not have the financial knowledge or experience needed to make profitable investment decisions.
The Robo advisor will invest your money and rebalance your portfolio based on your preference, your risk appetite and a lot more.
Upon comparing Robo advisor vs mutual fund, anyone can easily tell you that selecting a Mutual Fund of your liking is not an easy task.
5. Quick and easy setup and rebalance
A Robo advisor is extremely easy to setup once you fulfill all formalities with the Robo advisor firm. All payments, regular investments schedule are thn clear and easy to setup.
A Robo advisor account can generally be opened with minimal documentation.
6. Simple investment strategies
As per your investment personality, Robo advisors try to utilize the AI based algorithm to provide you with suggestions best suited for your portfolio. They more or less work on simple asset allocation investment strategies e.g. invest 60% in equity market based ETF and 20% in Fixed income based funds and the remaining 20% in Gold or other safe havens.
Most likely, you won’t have several instruments to watch, so you will be able to easily and rapidly assess Robo advisor performance vs Mutual Funds returns.
7. Lost Human connection
If you compare Robo advisor vs mutual fund in terms of method of customer service, you will realize that a robo advisor says hello on a web chat or phone while a mutual fund generally provides you with a human advisor at your service.
However, if you prefer speaking to a real human, or if you would want to be hand-held perhaps for website or software interface training, then a human advisory service would be much better than a robo advisor
You can see Robo Advisors Pros and Cons in detail here:
Advantages of robo advisors. Why robo advisors are bad? Learn Robo advisor Pros and cons. Are Robo advisors profitable? Learn why not to use a robo advisor?
Mutual Funds advantages and disadvantages
Let me tell briefly you about the various advantages and disadvantages of Mutual Funds.
Advantages of investing in mutual funds
Most mutual funds are actively managed by a human fund manager. The fund manager selects underlying assets based on his own analysis and judgment.
Instead of trying to replicate the performance of the tracked index, he will buy or sell different Securities and will keep rebalancing the fund’s portfolio (purchasing or selling shares) at all appropriate times.
As an investor looking for consistent stable returns, you should certainly diversify your portfolio across various asset classes, and securities. With a well diversified mutual fund, you can in-effect diversify your portfolio across hundreds of securities.
For example, if you buy an index tracking mutual fund, you can immediately diversify across all the securities tracked in that index.
Lower investment expenses
Mutual funds are the cheapest ways to invest in securities. If a Fund manager executes a trade, its total transaction charges will be divided across all Mutual Fund holders thereby resulting in really low transaction costs for each individual investor!
For more advantages of investing in mutual funds, please see the following article.
Mutual Funds drawbacks
A few of limitations of mutual funds are described below.
Managed funds can be expensive
Actively managed funds have very high expenses. The actively managed fund could also invest in low liquidity stocks as per the fund manager’s discretion. This further increases trading expenses.
Less control over your portfolio
If you invest in mutual funds, you are relying on the fund manager’s discretion to build a portfolio. You cannot decide to invest more in a specific sector or stock unless you purchase shares in a sector specific Mutual Fund that purchases securities of that particular stock market sector only.
Capital gains tax
Mutual funds exit an investment based on fund manager’s discretion, offering you – a Mutual Fund investor – less control over when you pay capital gains taxes.
Concluding remarks on selection between Robo Advisors and Mutual funds
It’s very difficult to say that one investment is better than other in every department. In reality, there are various options for both Robo Advisors and Mutual funds. Therefore, they are better in different aspects for different investors. For instance, people who simply want to fund an investment plan with low charges might find Robo Advisors superior to Mutual funds.
On the other hand, investors who want to ensure their money is being managed by somebody with decades of experience and a solid track record might be better off with mutual funds vs Robo Advisors.
Ultimately, it completely comes down to what you’re looking for. Though, both these investment options can be very successful. They both can sometimes be superior to your own self-created investment portfolio built with direct stock selection & investing. This is true especially if you are not experienced and don’t know what you’re doing when trying to invest your money all by yourself.
So, when it comes to Robo advisors or mutual funds, your goals, funding options, asset class likings, liquidity preferences, risk personality, and investing targets will have a lot to do with which one is a better choice.
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I hope you enjoyed reading this article. In subsequent articles in this Robo Advisor and Mutual Funds series, I will explain more on all the above-mentioned points and write more on some advanced topics.
Thank you for reading this article. I have written several other such Investment knowledge related articles in other sections on this website.
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Frequently Asked Questions
Do Robo advisors manage more money than Mutual Funds?
Robo advisors have been around for decades. Betterment, one of the oldest and largest, was established over 10 years ago and has $13.5 billion assets under management. However, it is just an ant in front of the elephant Vanguard when compared. Vanguard was established in 1975 and has an AUM of around 5.1 trillion USD.
Are robo-advisors cheaper than mutual funds?
Costs and fees certainly do matter! Several low-cost Mutual Funds charge less than 0.10 percent management fees. However,the Robo “Advisor” charges are on top of the underlying Mutual Funds charges.
So with a Robo Advisor, you would probably be paying 0.25 percent more to make it 0.35 percent total fees as compared to the underlying fund’s 0.10 percent fees when invested directly. If you consider this over a decade, on a portfolio of thousands or millions of bucks, the charges do become significant.