Index Funds vs Mutual Funds

Many, but not all, index funds are structured as mutual funds, and many mutual funds are index funds. Generally speaking, though, “index fund” refers to a fund whose investments closely track a market index, while “mutual fund” refers to a broad class of investment funds that follow a range of investing strategies.

About mutual funds: These are funds managed by fund managers and not all mutual funds are index funds. These funds can be managed to follow a certain index (passively managed) or allows flexibility from the fund manager to try and beat the market (actively managed). Either way, there are fees that you will have to pay and your liquidity might suffer. 

Index Funds are a sub-set of Mutual Funds. There are Actively Managed Funds (the ones that most likely not to outperform the market)And there are Index Funds that just follow the indexes or a whole market.

Both are Mutual Funds

Index funds seek market-average returns, while active mutual funds try to outperform the market. Active mutual funds typically have higher fees than index funds. Index fund performance is relatively predictable over time; active mutual fund performance tends to be much less predictable.

The upside with index funds is that index funds are often exchange traded, meaning you are more liquid with your investment in an index fund that is exchange traded (ETF). With a mutual fund not exchange traded, the liquidity is not as strong.

There are a few differences between index funds and mutual funds, but here’s the biggest distinction: Index funds invest in a specific list of securities (such as stocks of S&P 500-listed companies only), while active mutual funds invest in a changing list of securities, chosen by an investment manager.

This distinction has a few knock-on effects:

• Index funds seek market-average returns, while active mutual funds try to outperform the market.
• Active mutual funds typically have higher fees than index funds.
• Index fund performance is relatively predictable over time; active mutual fund performance tends to be much less predictable.

And lastly, over a long-enough period, investors may have a better shot at achieving higher returns with an index fund. Exploring these differences in-depth reveals why.