Index Funds vs Mutual Funds

Difference Between Index Funds and Mutual Funds

Both the index funds and mutual funds are used to diversify the portfolio where the index funds are the closed ended funds that tracks generally the specific index without deviating their holding from it whereas mutual funds are the open ended funds  that are managed actively which deviates from their benchmark by investing in the variety of the stocks.

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Both funds are a source of investment and are saved in subscribing to the units of the fund. 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 are as follows –

Index vs Mutual Funds Comparative Table

Index FundsMutual Funds
It doesn’t charge high fees as compared to mutual funds.It charges high management fees due to active investing, 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 when compared to index funds in practical.
It generally tracks a particular index and does not deviate their holding from that index.It deviates from the benchmark and can invest in various stocks since they make active investments and are tracking the stocks.
Closed-EndedOpen-Ended
Short to the medium time investment horizonGenerally, the long investment horizon is useful when an investor is opting to invest in these funds.
Investment is in an index that purchases all the stock in the same proportion as of the index.Investment is in stocks. There is no fixed proportion of stock investment, and they invest in stocks according to the performance of the company or the intrinsic value of the stock.
It incurs less expense. They do not incur a considerable expense in the selling and buying stock; hence their expense ratio is less than the mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read 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 return of the fund.

Final Thoughts

Whether to invest in the index or mutual funds is a question of the investment objective of the investor, and it also depends on the time horizon and the 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 of the investor. However, history has suggested that the return of the index fund has outperformed the recovery from the mutual fund. This is mainly because of the expense and the management fees, which are of 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 USA index fund has recently become a significant source of investment and return, and a lot of 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 an investor who is 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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This has been a guide to Index Funds vs Mutual Funds. Here we discuss the top difference between them along with infographics and comparison table. You may also have a look at the following articles –

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