Robo-Advisor vs. Mutual Fund: What’s the Difference? (2024)

Investing is a key part of building wealth over the long run, but constructing and maintaining an investment portfolio can be difficult. To properly diversify, you should own dozens of different securities, but managing a portfolio like that can lead to a lot of headaches.

Mutual funds and robo-advisors are two ways that investors can get help building and managing a portfolio. Mutual funds serve as a sort of prebuilt portfolio that investors can buy into, with professional managers who handle the day-to-day management and rebalancing. Robo-advisors, on the other hand, are computer programs that construct an investment portfolio for investors based on their specific situation.

Key Takeaways

  • Robo-advisors are automated computer programs that design and manage investment portfolios on behalf of an investor.
  • Mutual funds are professionally managed investment funds that hold a wide variety of securities.
  • Mutual funds follow a stated strategy, so investors can try to choose funds that align with their financial goals.
  • Robo-advisors build and manage each investor’s portfolio, which means they can offer more personalized service.
  • Many robo-advisors construct their portfolios using multiple mutual funds.

Robo-Advisor vs. Mutual Fund: Key Differences

Many investors turn to robo-advisors and mutual funds for help with managing their investments. To decide which is right for you, it’s important to understand the key differences between them.


One of the first things to think about with any investment service is the cost. Fees play a huge role in determining your long-term investment returns. Even a small difference in fees can compound to huge amounts over 10, 20, or 30 years.

Both robo-advisors and mutual funds charge fees for their services. Robo-advisors charge a management fee, usually equal to a percentage of your invested assets each year. Mutual funds charge an expense ratio, which is also equal to a percentage of your invested assets. Some mutual funds may also charge other fees, such as purchase or sales loads.

For example, Wealthfront is a robo-advisor that charges a 0.25% fee annually. The Vanguard Wellesley Income Fund (VWINX) charges an expense ratio of 0.23% annually.

Keep in mind that robo-advisors typically build your portfolio by investing your money in mutual funds or exchange-traded funds (ETFs). This means that you pay the management fee to your robo-advisor on top of the expense ratio charged by the mutual funds that the robo-advisor places your money in. Thus, robo-advisors will often be more expensive than investing in mutual funds directly.

Mutual fund expense ratios can vary widely. Some, typically passively managed funds, have very low or even no expense ratio. Others, usually actively managed funds, can charge 1% or more.

Investment Strategies

Mutual funds can have a wide variety of investment strategies. You can learn about the strategy and objectives of a fund by reading its prospectus. Some funds try to mimic the returns of a specific index that they track. Others focus on buying companies that have a history of increasing dividends. Yet others simply try to find undervalued companies to buy low and sell high.

Investors can examine different mutual funds and try to find one that aligns with their specific investment goals. For example, an investor looking for higher returns may be more interested in a fund that has a heavier focus on growth stocks than one that invests mostly in bonds.

Robo-advisors can adjust their investment strategy to the needs of each investor, building a portfolio that aligns with that investor’s goals. For example, a robo-advisor would likely build very different portfolios for a 25-year-old hoping to invest for the long term and a 65-year-old who wants to produce income in retirement.


A major advantage that robo-advisors have over mutual funds is personalization. Think of it as the difference between having a private chef and going to a restaurant.

Just as a private chef can make whatever meal you want, a robo-advisor can customize your investment portfolio based on your specific situation and desires.

When you visit a restaurant, you can only order off the menu. When investing in mutual funds, you can only look at the selection of funds available, consider their investment strategies, and invest in the one that aligns most closely with your goals. You can’t make customizations to their strategies.

Minimum Investment

Many investments have minimum investment requirements. To start investing, you’ll need to have enough money to hit that minimum.

Minimum balance requirements vary by robo-advisor and by mutual fund.

For example, Wealthfront has a $500 minimum investment. Its robo-advisor competition, Betterment, has no minimum balance requirement but does require that investors have at least $100,000 in their portfolios to access its Premium service.

A small number of mutual funds have no minimum investment requirement, but more typical minimums are in the $1,000 to $3,000 range.

What Is a Robo-Advisor?

A robo-advisor is a specialized computer program that helps investors construct and manage their investment portfolios.

To start using a robo-advisor, you usually have to fill out a survey, giving it information such as your age, income, debts, financial situation, risk tolerance, and future goals. The robo-advisor sends your data through an algorithm that produces a portfolio to help you achieve those goals.

After that, the program manages your portfolio for you. It invests when you deposit money and sells shares when needed to cover withdrawals. It also handles rebalancing and other day-to-day portfolio management.

Robo-advisors are still relatively new, with the first hitting the market in 2008. Despite their youth, they’ve proven quite popular, with estimates that they’ll have about $1.5 trillion under their management by the end of 2023.

Robo-Advisor: Advantages and Disadvantages

Robo-advisors offer significant benefits to investors, but you need to consider the drawbacks before you sign up.


  • Hands-off investing

  • May be cheaper than working with a human advisor


  • Fees can build up

  • Lack of human involvement in decisions

Pros of Robo-Advisors

Robo-advisors are a good solution for people who want to be hands-off with their investing while still getting a personalized portfolio designed for their specific situation. Once you go through the process of opening an account and telling the program about your finances, all you have to do is make deposits and withdrawals and check your performance on occasion.

They also tend to be cheaper than working with a human financial advisor, making them a good option for cost-conscious people who want more hand-holding rather than managing their own investments independently.

Cons of Robo-Advisors

Robo-advisors usually build portfolios by investing in a variety of mutual funds or ETFs. They also charge management fees. This means that you’ll tend to pay more when you use a robo-advisor because you have to pay the expense ratio of the mutual funds that the robo-advisor invests in for you, as well as the fee charged by the robo-advisor.

You also have to consider that robo-advisors aren’t human. They’re only as good as their programming and the data that you give them. If you don’t answer a robo-advisor’s questions honestly and accurately, or if your financial situation changes, then it may not have built the right portfolio for you.

If you were investing directly in a mutual fund instead, you might notice sooner when the fund’s objectives and strategy stop aligning with your goals.

What Is a Mutual Fund?

Mutual funds help investors easily build a diverse investment portfolio. They do this by pooling funds from multiple investors, then using those funds to buy stocks, bonds, and other securities. By buying shares in a mutual fund, investors get exposure to all the investments that the individual fund holds.

Different funds can have different strategies for investing. For example, you could buy shares in a fund that focuses on real estate or in a fund that tries to produce income by holding bonds. Mutual funds are managed by financial professionals and are often offered by large investment firms like Fidelity Investments or Vanguard.

One key thing for investors to know is the difference between a mutual fund and an index fund. Index funds are a type of mutual fund that are passively managed and aim to match the performance of a specific index, like the S&P 500. This lets them keep their expense ratios very low.

Some mutual funds that aren’t index funds take a more active strategy, with fund managers trying to beat rather than match the market. These actively managed funds usually have much higher expense ratios than index funds.


Mutual funds offer a relatively hands-off way to invest. However, investors have to accept the strategy of any fund in which they invest. They don’t have the option to personalize the strategy of a fund to their personal goals.

Mutual Fund: Advantages and Disadvantages

Mutual funds tend to be cheaper than robo-advisors, but you also have to consider the drawbacks before deciding to invest.


  • Low cost

  • Professional management

  • Some offer added perks


  • Lack of personalization

  • Some have high expense ratios

Pros of Mutual Funds

Mutual funds, especially index funds and other passive, low-cost funds, can be one of the easiest and least expensive ways to invest. If you can find a fund that has an investment strategy that matches your risk tolerance and goals, it can be an all-in-one solution for your investing portfolio.

They also provide the benefit of professional management. You don’t have to buy dozens of individual securities and rebalance your portfolio regularly. You can rely on the fund managers to handle that.

Some investment companies also offer perks as you invest more in their mutual funds. For example, as your balance in Fidelity mutual funds grows, you can get more rewards from the company’s credit card and get complimentary identity theft insurance.

Cons of Mutual Funds

The greatest drawback of mutual funds compared to robo-advisors is the lack of personalization. You might find a fund that matches your strategy and goals, but there’s no guarantee that will happen.

Robo-advisors can easily personalize your portfolio for you, building one designed specifically to reach your goals.

Also, in some cases, mutual fund expense ratios—especially for actively managed funds—can get quite high. Given that robo-advisors typically build portfolios using low-cost index funds, investing in these mutual funds may be more expensive than using a robo-advisor.

Robo-Advisor vs. Mutual Fund: Which Is Best for Me?

Mutual funds and robo-advisors can both be a good way to invest, so you’ll have to think carefully to decide on which to use.

On one hand, if you want the most hands-off way to invest, then a robo-advisor is the way to go. It will build and manage your portfolio entirely on its own. If you want to use mutual funds, investing is relatively easy, but you do have to put in the effort to find the right funds to invest in.

The best robo-advisors also offer some additional benefits and services. A popular offering is tax-loss harvesting, which they argue can increase your returns, often by enough to more than cover the fees that they charge.

On the other hand, if you want to keep your costs as low as possible, then mutual funds are likely a better fit. If you have relatively simple goals or don’t have the large amounts of money necessary to get significant benefits from strategies like tax-loss harvesting, using a robo-advisor might be overkill.

Should I Invest by Myself or Use a Robo-Advisor?

This is largely a question to do with your goals and personal preference. Robo-advisors make investing far more hands-off, but they may come at a higher cost than investing on your own.

Do Robo-Advisors Outperform the S&P 500?

Robo-advisors design unique portfolios for each investor. Some of these portfolios , while others won’t.

For example, over the past five years as of this writing, Wealthfront’s Risk Score 9 portfolio produced an average annual return of about 6.61% over a five-year period. Its less risky Risk Score 5 portfolio produced an average annual return of about 5.69% over that same period. During that same time, the S&P 500’s average annual return was approximately 9.65%.

Who Is a Robo-Advisor Best Suited for?

Robo-advisors are typically best for people who want to be as hands-off with their investing as possible and who have sufficient assets to benefit from services like tax-loss harvesting. Very high-net-worth individuals (HNWIs) with complex estate or tax situations, or those with very small balances, may not get the full benefits that robo-advisors can offer.

What Is the Average Return on a Robo-Advisor?

Average returns for robo-advisors can vary widely given that they build unique portfolios for each investor. Wealthfront publishes historical return data for some of its portfolios. For example, over the past five years as of this writing, Wealthfront’s Risk Score 9 portfolio produced an average annual return of about 6.61%. Its Risk Score 5 portfolio produced an average annual return of around 5.69%.

How Risky Are Robo-Advisors?

Robo-advisors can construct risky portfolios that focus heavily on volatile investments, or, at the other extreme, they can construct safer portfolios that will lose less value during market downswings. It all depends on the goals and risk tolerance that you provide to the robo-advisor.

The Bottom Line

Robo-advisors and mutual funds are two options for investors who want to avoid the day-to-day aspects of managing their portfolios. Robo-advisors in general tend to be more expensive but can build personalized portfolios and offer services like tax-loss harvesting. Mutual funds offer the benefit of professional portfolio management, but you’ll have to put in the effort to find the right fund for your needs.

I'm an investment enthusiast with extensive knowledge in portfolio management, mutual funds, and robo-advisors. My expertise stems from years of practical experience, keeping a close eye on market trends, and staying updated on the latest developments in the investment landscape.

Now, let's delve into the concepts discussed in the article:

1. Mutual Funds:

  • Definition: Professionally managed investment funds that hold a diverse range of securities.
  • Strategy: Stated in the prospectus, strategies can vary from mimicking specific indices to focusing on dividends or undervalued companies.
  • Investor Choice: Investors select funds aligning with their financial goals.
  • Costs: Charge expense ratios, which can vary widely based on active or passive management.

2. Robo-Advisors:

  • Definition: Automated computer programs designing and managing investment portfolios based on investor information.
  • Personalization: Offers more personalized service by tailoring portfolios to individual goals.
  • Costs: Charges a management fee, usually a percentage of invested assets annually.
  • Advantage: Provides hands-off investing and may be cheaper than human financial advisors.

3. Robo-Advisor vs. Mutual Fund: Key Differences:

  • Fees: Both charge fees – robo-advisors have a management fee, while mutual funds have an expense ratio.
  • Investment Strategies: Mutual funds have diverse strategies; robo-advisors tailor strategies to each investor.
  • Personalization: Robo-advisors offer customization, while mutual funds lack personalization.
  • Minimum Investment: Both have minimum investment requirements; robo-advisors like Wealthfront may have a $500 minimum, while mutual funds vary.

4. Advantages and Disadvantages of Robo-Advisors:

  • Pros: Hands-off investing, potential cost savings compared to human advisors.
  • Cons: Fees can accumulate, lack of human involvement in decisions.

5. Advantages and Disadvantages of Mutual Funds:

  • Pros: Low cost, professional management, some offer added perks.
  • Cons: Lack of personalization, potential for high expense ratios.

6. Robo-Advisor vs. Mutual Fund: Which Is Best for Me?

  • Decision Factors: Consider hands-off preference, cost sensitivity, and personalization needs.
  • Additional Services: Robo-advisors may offer benefits like tax-loss harvesting.

7. Should I Invest by Myself or Use a Robo-Advisor?

  • Personal Preference: Depends on goals and preferences; robo-advisors make investing hands-off but may come at a higher cost.

8. Do Robo-Advisors Outperform the S&P 500?

  • Performance: Robo-advisor portfolios vary; historical returns of portfolios like Wealthfront's differ from the S&P 500.

9. Who Is a Robo-Advisor Best Suited for?

  • Suitability: Best for those wanting hands-off investing, with sufficient assets to benefit from services like tax-loss harvesting.

10. Average Return on a Robo-Advisor:

  • Varies: Returns can vary widely; for example, Wealthfront's portfolios show different average annual returns.

11. How Risky Are Robo-Advisors?

  • Risk Level: Depends on the portfolio constructed by the robo-advisor based on investor goals and risk tolerance.

12. The Bottom Line:

  • Summary: Robo-advisors and mutual funds offer options for investors seeking hands-off portfolio management. Robo-advisors provide personalization but may be more expensive, while mutual funds offer professional management with less customization.

Feel free to ask if you need further clarification or have specific questions on any of these concepts.

Robo-Advisor vs. Mutual Fund: What’s the Difference? (2024)
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