An interesting question that I’ve heard in the past is “Should I invest in a Roth IRA or mutual funds?”
It’s an interesting question because Roth IRAs and mutual funds are two completely different types of things and not comparable at all. Read on to learn about the differences of Roth IRA vs Mutual Funds.
The short answer is that a Roth IRA is a type of account and a mutual fund is a type of investment (which can be held inside a Roth IRA).
To use the above image as an analogy, one could think of the ship as a Roth IRA and the containers as mutual funds. One can put anything on a ship, including containers full of things. Or they can fill the ship up with items not in containers. But nobody would use ships and containers interchangeably. A longer answer is below.
Roth IRA is a type of retirement account (we’ll technically, it’s an Individual Retirement Arrangement according to the IRS). Investors can own just about anything within an IRA. For example, many investors own mutual funds inside an Roth IRA.
Mutual funds are a type of investment product/vehicle. Mutual funds are essentially a portfolio of assets (such as stocks or bonds or other assets) that issue shares to investors. So a mutual fund may own billions of dollars of stocks and I can purchase a fractional share of that portfolio and participate in the investment performance of the mutual fund.
Roth IRA vs Mutual Funds
The question of Roth IRA vs mutual funds may be the result of confusion or misunderstanding.
One reason for confusion is that some salespeople who pitch a certain product may imply that a Roth IRA is the product. For instance, banks may pitch a CD as a Roth IRA CD. The truth is that it would be a CD registered/titled as a Roth IRA. In other words, Roth IRA would be the account type rather than the investment vehicle. In my experience, sometimes the people selling various financial products do not even understand the basics unfortunately.
Another cause for confusion is simply that people are new to investing and confused about the words and terminology. That’s why this blog exists, to help people even when questions are very simple.