Mutual Funds vs. Index Funds – What is the difference, and how does it matter

Mutual fund vs. Index fund, if you are in a dilemma about what you must invest in, you must first understand which investment vehicle aligns with your needs and long-term goals. 

Remember, in comparison to buying stocks investing in mutual funds is much simpler. Mutual funds offer to cushion for risks, requiring less real-time monitoring of the movement of share prices. 

If you are planning to invest in mutual funds, it is essential to have some knowledge about the same. You will be facing a wide range of choices, which will perhaps make you spoilt for choice. Zeroing in on one scheme might become confusing. As such, in this article, let us find what the difference between a mutual fund and an index fund is. 

Difference between index and mutual fund

Two types of mutual funds are present, namely, active schemes and passive ones. The prospects of earning better returns are high in active schemes. But if you are unwilling to take the risk, the passive schemes will work in your favor. Let’s dive in and determine the main difference between index and mutual fund. 

An index fund or Mutual fund

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Management style and investment

Fund allocation and management are one of the primary differences between the two. The actively managed mutual funds usually require the services of a fund manager. He decides the investment proportion and combination of assets. As such, the outcome of these funds will rely on the skill set of the manager, the bias, and experience. 

On the other hand, the best index funds are managed passively. The index funds will use popular benchmarks like the Nifty 50 instead. 

Expense Ratio

From the investor’s perspective, one of the main differences between index or Mutual funds is the operating cost. The cost involved in managing these funds annually refers to the expense ratio. It is mainly expressed as assets under management or AUM of any scheme. 

For actively managed mutual funds, the fund manager is needed, whereas, for passively managed mutual funds, no fund manager is required as such, investments requiring the services of the fund manager attract a higher operating cost. 

Risk

No investment will guarantee zero risk. Just like a mutual fund, an index fund is a kind of mutual fund, and such market volatility plays an instrumental role in determining the returns. 

Aside from the above, the other factors that help differentiate the two include simplicity and performance. 

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