If you’ve just entered the investment arena, you’ll stumble upon two investment avenues – mutual funds and index funds. Both are great investment options, but they differ in the ways they operate. Mutual funds offer you the flexibility to choose stocks. However, index funds allow you to invest in the stocks included in the same index. To understand index vs mutual fund differences, you’ll have to look at management style and investment objective details.
Learn more about these funds in this article for making better investment decisions.
The primary difference between index fund and mutual fund is their management processes. A mutual fund may contain several assets, including an index fund. A fund manager manages it and analyses factors like asset combination, trends, and investment proportion.
The underlying index and benchmark are important for an index fund's management. These funds are passively managed and follow the assets within their index. Being a collection of stocks or other assets, index funds track benchmarks like the Nifty 500.
So, index funds try to mimic an associated benchmark and invest in similar units. Unlike mutual funds, you won’t get help from a dedicated fund manager.
Risks are associated with all types of funds and investments. If your mutual fund manager doesn’t select the appropriate stock, you may not receive desired returns.
Other risk factors related to mutual funds are –
If you’re investing in index funds, you need to consider the underlying index. The risk will be related to this index's volatility. For instance, the Nifty Next 50 index is more volatile than the Nifty 50. So, if your index fund tracks Nifty Next 50, the returns won't be great.
Moreover, index funds offer a weighted average of all their assets during returns. If some of these assets aren’t performing well, the final return may be lower than expected.
The associated operating costs are vital to consider during index fund vs mutual fund comparison. These expenses depend on how you manage and operate your funds.
For instance, you'll need a dedicated fund manager to handle your mutual fund investments. The manager has to analyse market trends, predict stock prices and select suitable stocks. Further, they have to understand economic fluctuations while investing on your behalf.
So, the yearly expenses of availing of the services of a fund manager can be quite high.
If you choose index funds, they’ll be more affordable as they are passively managed. With little or no involvement of a fund manager, the expense ratio is lower than in mutual funds.
Index funds follow an associated index and might produce high yields. This will solely depend on the underlying index’s performance and the current market conditions. So, if the index is performing poorly, the index fund may fetch you good returns.
For those interested in long-term gains, mutual funds offer better returns. These funds tend to beat market averages and offer excellent profits in the long run. That’s why managers spend so much time researching the right stock.
Are you still undecided about index vs mutual fund investments? Look at your finances. If you have a substantial investment budget, go for mutual funds. However, if you require funds quickly and are intrigued by short-term investments, index funds will be ideal.
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If you can't handle high operating expenses, index funds will be safer even if you bear some losses. Mutual Funds can be expensive with higher expense ratios and riskier.
However, try investing a smaller amount if you're new to all this.
Stock investments are better if you have the profound market knowledge and understand your risks. Otherwise, invest in index funds.
