A mutual fund serves as an instrument that operates with pooled money brought forward by investors. This pooled fund is invested in the stock market in assets that range from stocks and bonds to other financial instruments. Actively managed mutual funds invest money by a fund’s objective using the expertise of a fund manager. Conversely, passively managed funds merely replicate an index or benchmark.
Investing in mutual funds gives you access to diversification. Different mutual funds have different objectives depending on the investor's needs. Before investing in a mutual fund, it is essential to remember that they are subject to market volatility.
Index funds are a kind of mutual fund replicating a certain benchmark or index. Stocks from the same sector are shelved together under a given index that helps highlight a market sector.
Since Index funds passively mimic a benchmark index, they aim to generate similar returns. Their fund managers do not actively choose stocks but follow the benchmark composition. In India, index funds are available as exchange-traded funds (ETFs) and mutual funds, with ETFs traded on the stock exchange and mutual funds offered by fund houses.
The table below discusses the differences and similarities between mutual funds and index funds.
Now that you have read this article, you should be able to answer the question, “Is an index fund a mutual fund?” and know that index funds serve as a kind of mutual fund. Deciding whether index funds are the most appropriate mutual funds for you to invest in ultimately depends upon your investor profile. Your financial goals, your threshold for risk, the amount of money you are willing to put in and the time frame you are eager to devote to investment are all critical factors when finding the right fund. And if you’re looking to begin your investment journey, select the right kind of funds and check out Fi.
Index funds serve as a kind of mutual fund; however, not all are index funds.
Some advantages that index funds have over mutual funds are as follows.
No, other mutual funds are riskier than index funds since they work to try to beat the market. Index funds simply wish to mimic a benchmark, providing slow but dependable returns over time.
Two shortfalls associated with investing in index funds are as follows.
Index funds are considered better for several reasons. Firstly, they offer broad market exposure by tracking a specific market index, such as the S&P 500, allowing investors to diversify their holdings across various companies. Secondly, they have lower expense ratios than actively managed funds, which can eat into investment returns over time. Lastly, they have historically shown competitive performance due to their passive investment approach and lower costs.
Index funds are generally considered low-risk investments since they aim to replicate the performance of a specific market index and provide broad diversification across multiple companies and sectors, thus reducing the impact of any individual stock's performance on the overall fund.