What is the Difference Between Index Funds and Mutual Funds?

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Individuals invest in mutual funds based on the needs and financial goal depending on the risk profile.

Mutual Funds are of different types with various investment options. Before deciding on the product, one needs to have the product knowledge.

What is the Difference Between Index Funds and Mutual Funds?

Index funds are part of Mutual Fund, whose returns are derived from certain index performance.

Let us understand the basic difference between Mutual Funds and Index Funds.

Index Funds

Index Funds today are a source of investment for investors looking at a long term, a less risky form of investment.

The success of index funds depends on their low volatility and, therefore, the choice of the index.

There are many indexes such as banking, IT, metals, industrial, infrastructure, energy etc. and each segment has its own index. These funds completely replicate the respective index.

Index funds tend to do well in a bull market. While, in a downtrend they lose money if they stick to the index.

Such funds are managed passively. They only track the performance of the index. Such funds are charged less as there is no much involvement of the fund managers.

Mutual Funds

A mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

In mutual funds, investment set of portfolio managers assess the market trends and make investments in funds based on that. The fee charged for actively managed funds are high.

In an actively managed funds, fund managers try to out-perform the particular market.

Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.

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Read more about: index funds, mutual funds
Story first published: Wednesday, May 20, 2015, 11:10 [IST]
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