Difference Between Index and Mutual Funds

Index vs Mutual Funds

Ever thought about investing your money on the stock market? It is one of the fastest growing industries in the world and one which has been around for several years now. Compared to other investments, it offers a higher return for your investments.

It is also very convenient since your investment is managed by a group of people. Here are some of the investment options that you have:

Index Funds

Index funds are collective investment schemes that replicate the movement of funds in a financial market. The set of rules are constant regardless of market conditions and they rely on computer models rather than human input in tracking which securities to purchase or sell.

The management of index funds is passive rather than active which provides it with lesser taxes and fees which in turn give the investor a lesser amount of profit. A portfolio manager runs the index fund.

It is not very accurate compared to other investments though and its performance is tracked through the index where it is benchmarked. It holds the same stocks as other well known indexes like the Standard & Poor�s 500 Stock Index.

Mutual Funds

Mutual funds are collective investments schemes that gather and invest money from several investors in securities like stocks, bonds, money market instruments, and commodities like precious metals.

They usually have a board of directors or trustees. Mutual funds allow investors to join in stock market trading without risks or additional costs. The performance of mutual funds depends on the stock or bond picks of its managers.

There are several types of mutual funds:

� Open-end fund, wherein at the end of every day, the fund issues new shares to investors and is ready to buy back shares at the current net value per share.
� Closed-end funds, which are registered investments companies that are not unit investment trusts (UIT) and sells its shares to the public through IPO or initial public offering.
� Exchange �traded funds, which has the combined features of the open-end and close-end funds. It is very convenient for foreign investors who have limited participation in traditional mutual funds.
� Equity funds, which are stock investments that focus on certain strategies and types of issuers.

Summary

1. Mutual funds are collective investments schemes that gather and invest money from several investors in securities like stocks, bonds, money market instruments, and commodities like precious metals while an index fund is a kind of mutual fund.
2. The management of mutual funds is done by a board of directors or trustees while the management of index funds is done by a portfolio manager.
3. Mutual funds are actively managed while index funds are passively managed.
4. The cost of investing in index funds is lesser because it relies mainly on computers while the cost of investing in mutual funds is more because it relies on a team of investment analysts and traders.
5. The performance of mutual funds depend on the stock or bond picks of its managers while the performance of index funds depend on the index to which they are benchmarked.

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