Index Funds vs Mutual Funds

Difference Between Index Funds vs Mutual Funds

Have you ever thought of investing in the funds like an index fund and ETF? As both are collective investment tools, most of the people get perplexed amidst the 2 investment vehicles. Funds are usually broken down into 2 types, Index Funds, and Mutual Funds. These both terms are used to refer to the underlying key objective of the fund. Nevertheless, they are not the same in the sense that an Exchange Traded Fund (i.e. ETF) is a type of Index fund which is a basket of securities or stocks that are traded on the exchange. But an index fund, on the other hand, is a kind of mutual fund, which will try to attempt to track the performance of any specific index.

Index funds can be ETFs (i.e. exchange-traded funds) or mutual funds that track an index, like the S&P 500 Index. The term mutual funds typically are referred to the funds that are actively managed which employ stock pickers with an objective of beating the stock market’s performance.

Benefits of index funds fund over mutual funds are

• They don’t require you to hold cash,
• They don’t have any minimum purchase criteria as in mutual funds,
• They are generally more liquid and of low cost than mutual funds
• Some ETF funds have tax advantage than open-ended funds.

While there are few disadvantages as well

• An index fund is traded through the day and hence subject to price manipulation.
• They are subject to market volatility as well.
• One can reinvest its capital gains and dividend in mutual funds while the same is less offered in an index fund

Head To Head Comparison Between Index Funds vs Mutual Funds (Infographics)

Below is the top 9 difference between Index Funds vs Mutual Funds

Key Differences Between Index Funds vs Mutual Funds

Both Index Funds vs Mutual Funds are popular choices in the market; let us discuss some of the major Difference Between Index Funds vs Mutual Funds.

• The Index funds are defined as a fund that will track a security market index and its traded like ordinary securities or the stocks. An index fund is a type of investment vehicle which will track the performance of the benchmark market index.
• Index funds are traded on a recognized exchange. On another hand, direct investment cannot be made in an index fund. But you can purchase an ETF and mutual fund that can either be bought at regular intervals through Systematic Investment Plan (i.e. SIP) or in a lump sum.
• Index funds are priced and traded throughout the day. On the flip side, mutual funds are priced at NAV which is determined at the close of the trading day.
• Pricing of an Index fund is based on supply and demand of the securities in the capital market. To the contrary, a mutual fund is priced as per the Net Asset Value (i.e. NAV) of that underlying asset.
• In Index funds only, manual orders will be placed that is you need to sign in to place the buy order while in the case of a mutual fund, one can automate its investment through Systematic Investment Plan by giving standing instructions to the bank.
• The liquidity and flexibility are comparatively higher in index funds than in a mutual fund.
• The trading fees of index funds like ETF is high. As contrary to an index fund, in case of mutual funds there are no or low trading fees.

Index Funds vs Mutual Funds Comparison Table

Below is the 9 topmost comparison between Index Funds vs Mutual Funds

Conclusion

Like the stocks and closed-end mutual funds, Index funds are traded on regular stock exchanges and are created with a specific purpose or say objectives. For example, an ETF’s (type of index fund) components may replicate and try to mirror the performance of a broader stock index, like the S&P 500 (one of the biggest stock indexes in the world), or a commodity like lithium. Because ETFs or say the index funds are traded on the regular stock exchanges, their valuations will change in real time entire period on the trading day, despite their underlying Net Asset Values.

A mutual fund is a kind of fund that combines the funds of hundreds or thousands of investors to buy the securities, which includes bonds, stocks, CDs, money market funds and many alike. All mutual funds as stated above do have specific purpose or objectives, for example, they might focus on a particular industry or sector, or will generate a predetermined income or rate of return.

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