Index Funds vs. Mutual Funds

Difference between Index Funds and Mutual Funds

Mutual funds are the most common tool that is used for investment in the current corporate world. Their name is derived from the fact of the number of people that come together to raise the amount, these amount is then managed by one company is investing in the various stock market and buying of securities. It is due to the past excellent records that majority of the people are moving to the use of mutual funds for investment purposes. On the other hand index funds are a minute proportion of the total funds that are employed by the portfolio manager to look after the returns from the economy.

Index funds

These funds are majorly employed for indexing. It simply means that a proportion of the funds are used to oversee the various returns from the stock market and other various sectors where investments have been done. This proportion of the mutual funds that is taken to cater for overseeing the various returns is called index funds. The various stock markets have different segments that have different indices. Most of the market is developed by S&P and Dow Jones Company.

These funds are passively managed. This is because the portfolio manager is simply to reproduce the index rather than creating of suppositions of capitalizing on the profits. Index funds have different magnitudes; while some may have only few stocks from the economy others may constitute all the stocks from the market. In the United States, Wilshire 5000 index fund constitute all the stocks available in the US stack market. Due to the inactive management of these funds, the amount of fee that is charged in investing in these funds is very small when compared to those that are charged while investing by mutual funds.

Mutual funds

From our earlier definitions, these funds are funds that are raised through individual contribution to one pool for investment in the market. The profit that is resulting from the investment is divided to members depending on the individual proportion of your contributed amount to the common pool. It follows then that mutual funds acts as a middleman between the consumer and the market and is responsible for generation of returns to the people who are holding its shares. In the current world, there are almost 25,000 mutual funds that are taking part in investment in various stock markets across the world. Every mutual fund has its own formulated guidelines that are used in making the various decisions that are required for better investment of their funds. Subject to the goals and objective of each mutual fund, the type of investing and the company to invest in depends on their supposed fit.

The major areas of investment by the various mutual funds include stocks, government securities and bonds. The major goals that are aimed by the mutual funds include elimination or minimization of risks to their investors.

Dissimilarities between Mutual Funds and Index Funds

It can be clearly observed that index funds are part of the mutual funds and that they are employed by the portfolio managers of the mutual funds in overseeing the market changes. They are in charge of determining the well accomplishing stocks in the market. In terms of management the index funds are passively managed whereas the mutual funds are actively managed. The index funds are majorly employed in reproducing the performance of the shares market and this is the major cause of the requirement of small fee that is charged when investing in index funds unlike the mutual funds which are actively managed.

However this does not mean that investing in index funds does not have maximum returns, some have invested in these funds and are enjoying decent profits from their investment. This due to the fact that the index funds reflect the share price at the stock market, making investors to get maximum profits when the rates are high as reflected by the funds. This is not the case for the mutual funds.

In a Nut Shell

  • It can be seen that index funds is part of the mutual funds
  • While index funds are passively managed the mutual funds are actively managed
  • Good profits can be gained by index funds depending on the market movement.
  • Cost of managing the index fund is relatively cheaper as compared to that of actively managing the mutual funds.
  • Index funds give the investor much more options to invest in at a cheaper cost.