Are Robo advisors better than Mutual Funds?

Deciding between Robo advisor and mutual fund can be tricky. In this article we will briefly check if Robo advisors are better than Mutual Funds. We will also look at Robo advisor pros and cons.

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 is whether one option is significantly superior to the other.

Let’s start with taking a quick look at what is a Robo Advisor.

What is a Robo Advisor?

A Robo-advisor is a reliable digital financial service that utilizes technology to:

• collect investors’ information about their and risk appetite, as well as their current financial situation.
• automate their investing goals

You can think of Robo Advisors as Mutual Fund advisors with far lower charges.

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 benefits

1. Robo advisors helps you define the exact details of your investment by auto-calculating when, where and how much to invest
2. No previous investment knowledge is required. The robo advisor will choose the fund based on your risk profile
3. Financial advice on your investment is generally FREE as per your risk profile.
4. Robo advisors help you invest in a diversified portfolio by suggesting investments in various asset classes based on your investment goals.
5. Robo advisors helps you with auto-rebalancing
6. Investments done through Robo Advisors can be partially or completely redeemed at the current market value.
7. Personalized financial planning is provided by live-chat feature or AI based Q & A using the answers provided in the initial questionnaire.
8. Ensure Goal-based investing using Robo advisors. The Questionnaire will to help determine your risk profile and investment goal

AI based investing via Robo Advisors

After opening an account with a robo advisor, an investor has to fill up a questionnaire to define his risk profile. Those questions are there to ascertain your investing psychology. It helps the robo in understanding your return expectations, risk appetite, and inclination toward certain asset classes.

The Robo then suggests a few funds or ETFs for your portfolio. You may go on the path of selecting a few instruments out of those suggested ones and place a buy order yourself. You also have the option to letting the Robo advisor place the buy/sell orders for you.

Mutual Funds advantages

1. Mutual fund are professionally managed by expert fund managers. He effectively uses his sense of the market and makes an investment judgement based on the fund’s theme.
2. An investor needs to have at least little knowledge to decide which mutual fund to buy — index tracking, actively managed, sector-specific and so forth. A human advisor can however assist in MF selection.
3. Investment advice is mostly chargeable — a human advisor will generally charge money for providing investment guidance.
4. Mutual funds also diversify your investments by investing in several securities but they have to stick to their underlying theme.
5. Rebalancing of Mutual funds investments can be done by you. But the rebalancing of a particular MF’s holdings is managed by the fund manager.
6. A point to note here: If you want to redeem your investments partially or completely at the current value, you need to invest in only Open-ended Mutual Funds. Closed ended MFs do not allow exit before a lock-in period.
7. All kinds of personalized financial planning comes at a cost. A human advisor will charge for his advisory services.
8. There are wide range of MF schemes available to meet personal self-defined goals.

Disadvantages of robo advisors

1. Limited investment options

The first disadvantage of Robo advisors is the options it provides to investors. If you with to invest in only specific stocks, you probably would want to make your own investment portfolio.

Robo advisors would not appeal to investors who wish to actively make final decisions regarding their money & investments.

The options provided by Robo advisors are in general based on the questionnaire it presents to you before you start making any investments.

For example, one of the questions could be: Will you redeem your holdings if your portfolio falls 20% in value?

2. Almost nil human communication

Robo advisors provide real time assistance generally via AI based chatbot. If you desire help over phone or in-person, this would come at an additional cost.

Upon comparing Robo advisor vs mutual fund, you will realize that 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.

It’s very difficult to say which one is better than other. There are a plethora of options for both Robo Advisors and Mutual funds. One is better than another in different aspects for different investors. For instance, people who simply want to fund a stable 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 than Robo Advisors.

So, when it comes to Robo advisors or mutual funds, your goals, funding options, asset class preference, risk appetite have a lot to do with which one is a better choice.