What is the Difference between Index Funds vs Mutual Funds (WHICH ONE TO CHOOSE?)


Index funds and mutual funds are similar investment vehicles but have their own features. They are used interchangeably, but sometimes confusing.

In this article, we will learn about the difference between index funds and mutual funds, and you can decide which option is better for you.



Index Fund

An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.

An index fund creates a portfolio of stocks that mirror the collection of companies and performance of a market index, such as the S&P 500.

The one major benefit of index funds is that they have lower costs than actively managed funds. A fund's expense includes all of the operating expenses such as the payment to advisors and managers, transaction fees, taxes, and accounting fees.


Mutual Fund

Mutual funds are investment strategies that allow you to pool your money together with other investors to invest together. You can purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own.

The advantages of a mutual fund include:



By investing in mutual funds, you own a set of different stocks all in one packet. A mutual fund can have hundreds of stocks in it, but you only have to make one purchase. Without mutual funds, if you want to buy a hundred of stocks, you have to make a hundred of purchases, which means you have to pay trading commisions a hundred times.



A mutual fund helps you diversify natually. Instead of putting all your money in one stock, you spread out your money in different kind of stocks.

3, Professional management

Mutual funds are managed by professional portfolio managers.

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund.


Index Funds vs Mutual Funds

The commission fee of mutual fund is often higher than that of index fund.