A mutual fund refers to the financial investment composed of a pool of money combined from different investors who mutually agreed to invest their money in buying or selling securities such as stocks, bonds, and other assets to generate profit. On the other hand, an index fund is a type of mutual fund that is designed to imitate and track a specific stock market index.
Mutual funds pertain to the structure of the fund rather than the strategy of investment. However, index funds are about the approach of the investment. While these two have many differences, the main distinctions can be seen in the style of management, objectives, and cost.
Key distinctions between a mutual fund and an index fund:
- Mutual funds are actively managed while index funds are in a passive approach. It means that mutual funds should be regularly monitored by the fund managers. The success of an investment depends on the decisions made by the fund managers and they have the freedom to choose which securities will more likely meet their goals. In contrast, index funds are automatically targeting and matching the average market returns.
- Mutual funds aim to outperform the market while index funds are intended to imitate the performance of an index. In mutual funds, fund managers will target investments that most likely generate higher returns than the market. On the other hand, index funds have to match the returns of a particular benchmark index.
- Mutual funds and index funds are also different in cost. Mutual funds are more expensive because the appointment of trained fund managers that will properly decide on where to invest is costly. Unlike in index funds, there’s no need to avail the service of fund managers and only requires a lower management fee.
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