Difference Between Index Funds and Mutual Funds

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Both funds are a source of investment and are saved in subscribing to the fund’s units. Many funds possessing different characteristics and strategies are in the market, and investors can select from the pools of the fund to invest from.

There are different types of funds in the market, like equity mutual fund, mutual debt fund, hybrid mutual fund, index fund, exchange-traded fund, etc.

Index Funds vs Mutual Funds Infographics

Let’s see the top difference between index funds vs. mutual funds.

Key Differences

The critical difference between them are as follows –

  • The significant difference is that mutual funds investment objective is to exceed the benchmark return of the market or whichever funds of fund the mutual fund is investing in. On the other hand, the investment objective of an index fund is to maintain or match the return of the benchmark index, for example, to check the return of S&P index 500, etc.Index fundsIndex FundsIndex Funds are passive funds that pool investments into selected securities.read more, which are the fund’s investment mix, are generally automated as it is an investment in the exact holding type as the index, which is set as a benchmark index for the fund. On the other hand, the investment of mutual funds is mostly active. In contrast, mutual funds track the company or the share of the various stocks in the industry and withdraw and invest their holding in beating the return of the market.The index funds track the performance of the index, which is set as a benchmark, whereas mutual funds track the performance of the various stocks they have held and follow the performance of their holdings.Mutual funds are mostly open-ended funds, whereas index funds are close-ended and generally have a lock-in period.Index funds do not have a large management team as the investment in this fund is passive investingPassive InvestingPassive investing is a strategy used by investors to maximize their returns by avoiding frequent portfolio churning by buying and selling securities and instead buying and holding a diverse range of securities.read more. As a result, the fees lost in index funds are not such a large amount of the return compared to mutual funds, which are actively managed and have a large investment team.

Index vs Mutual Funds Comparative Table

Final Thoughts

Whether to invest in the index or mutual funds is a question of the investor’s investment objective, and it also depends on the time horizon and the investor’s risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more. However, history has suggested that the index fund’s return has outperformed the recovery from the mutual fund. It is mainly because of the expense and the management fees, which are significant amounts in mutual funds.

In India, the exposure to index funds is less when compared to mutual funds and also other developed markets. But in developed economies like the United States, the index fund has recently become a significant source of investment and return. Many investors have been lured into this scheme by active fund houses. Investment options should be weighted in light of the budget. Also, investor awareness about the new products in the market is critical for investors actively looking for financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more to invest their hard-earned money.

It is a guide to Index Funds vs. Mutual Funds. Here we discuss the top difference between them, along with infographics and a comparison table. You may also have a look at the following articles –

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