The comparison between index funds and mutual funds provided in this article will help you to understand both these concepts with ease.
These days, inflation is rising, which denotes that the products of daily use are getting more and more expensive. As compared to the past few years, we have to spend more money on almost everything, from buying daily necessities to huge investments like real estate. Ergo, to maintain our lifestyle, we need to increase our income at a rapid pace. This can be done by investing money smartly.
Mutual fund investments are believed to provide investors with decent returns in the long term. There are a variety of mutual funds available in the market, from which you can choose the right fund, as per your need and risk-taking ability. Some are high-risk-high-return funds, while others are low-risk-low-return funds.
Mutual funds invest your money in stocks of companies performing well, to maximize the returns. Now, what is an index fund? It is actually a type of mutual fund which is slightly different from the standard funds. Index funds have their own advantages and disadvantages over professionally managed mutual funds.
Difference Between Index Funds and Mutual Funds
Studying the difference between index funds and mutual funds is essential for investors. It is only after knowing the characteristics of both these funds that you can decide to choose one from them. The main aim of index funds is to ape the movements of an index of any capital or financial market. So, the returns generated for the investors in such index funds would be equal to the returns of the index and not more.
These index funds are not managed by professional fund managers. As a result, there is no continuous buying and selling of shares and securities of companies in these funds. As a result of this, the transaction costs or fee as a fund manager charges are quite low. This itself is the biggest positive for retail investors interested in index funds.
Many investors believe that index funds are quite safe as there is no fear of the decision of fund manager going wrong and causing heavy capital losses. The arrangement of the index funds is much simpler than that of mutual funds which are professionally managed.
On the other hand, the concept of mutual funds is exactly opposite. These funds are actively managed by the fund managers. The managers, in this case, have every right to invest in stocks which they think will provide great returns in the days to come. They also have the right to exit from stocks of companies posting poor financial results. Thus, entry and exit from stocks will be, as per the research reports and way of thinking of the fund managers. Now, most fund managers are highly qualified professionals having vast experience in managing investments, investment banking, and world capital markets.
However, there have been many times when fund managers have not been able to outperform the broader markets and index funds have performed better than the mutual funds managed by them. So, the investor should first trust the abilities of his fund manager, before opting to invest in a mutual fund. As stated above, investors have a wide range of choices when it comes to selecting mutual fund companies and types of funds.