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Finance Service

What is the difference between a mutual fund and index fund ?

06 Oct 2019 02:53:22 AM

An index fund is a type of mutual fund that tracks a particular market index: the S&P 500, Russell 2000 or MSCI EAFE (hence the name). Since there’s no original strategy, not much active management is required, and so index funds have a lower cost structure than typical mutual funds.

An index fund is an investment fund within the mutual fund family designed to track and mirror key benchmark indexes like the S&P 500 or the Russell 2000. Comprised of stocks, bonds and other investments, index funds are designed as passive funds that automatically track an underlying index.

The Investment Company Institute found that the average actively managed stock fund carried an expense ratio of 0.84% of assets in 2015, compared to index funds’ average expense ratios of just 0.11% of assets annually. Expense ratios are generally declining over time, but active funds will always be costlier than index funds.

For example, some investors want to make sure they max out their IRA contributions every year. But they prefer to spread the contributions over the course of the year, and they don’t want to forget a transaction by accident.

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