Index Funds vs Mutual Funds

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Index Funds and Mutual Funds

Both index funds and mutual funds are used to diversify the portfolio. In contrast, index funds are closed-ended funds that generally track the index without deviating their holding. In contrast, mutual funds are open-ended funds that are managed actively, which deviates from their benchmark by investing in a variety of stocks.

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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.

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Key Differences

The critical difference between them are as follows –

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Index vs Mutual Funds Comparative Table

Index FundsMutual Funds
It doesn’t charge high fees as compared to mutual funds.Due to active investing, it charges high management fees, generally 2% of the asset under management.
History has indicated that the return of passive investment, i.e., they outperform the returns of mutual funds.These are easy to beat and outperformed compared to index funds in practical terms.
It generally tracks a particular index and does not deviate its holding from that index.It deviates from the benchmark and can invest in various stocks since they make active investments and track the stocks.
Closed-EndedOpen-Ended
Short to the medium time investment horizonGenerally, the long investment horizon is useful when an investor opts to invest in these funds.
Investment is in an index that purchases all the stock in the same proportion as the index.Investment is in stocks. There is no fixed proportion of stock investment, and they invest in stocks according to the company’s performance or the intrinsic value of the stock.
It incurs less expense. It does not incur a considerable expense in the selling and buying stock; hence the expense ratio is less than the mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more.It incurs a high cost in the purchase and selling of stocks, and hence the expense ratio of the fund is a considerable amount, which also affects the fund’s return.

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.

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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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