Index Funds vs Mutual Funds

Investing in Index funds vs Mutual Funds

What is the difference between investing in Index Funds and Mutual Funds?

Index funds are passive entities with very low expense ratios that track specific indices like the S&P 500, or Dow Jones, or even “Total Stock Market”. The passive management style allows for them to be managed very cheaply.

Mutual funds are actively managed by a fund manager and while it may still have slated goals for investment and aim to track perform of a certain index, the stocks are selected via active management and in a philosophy they define.

One of the key pitfalls of active management is determining whether a manager can outperform in his investing process.

One of the key mistakes is to look at past performance and merely assume that will continue. It is very difficult to pick a fund manager and even more difficult to pick one that can beat the often high fees they charge.

Fees can be silent killers and come in many forms. Often there is an expense ratio based upon assets and some sort of bonus for performance. Some fund managers only charge for performance beating a certain index or goal. Stay away from funds with load fees.

The larger the mutual fund the more challenges it will face beating the performance of the indices. If you’re investing $100 billion dollars you can only invest in so many companies that will meaningfully affect your performance.

It is easier to outperform with less money than with more money.

This factor is a reason why you at home can learn to do better if you’re willing to commit time and effort.

In most situations we suggest you use Vanguard and purchase index funds. Vanguard is a provider of low fee funds and an excellent place to do your retirement investing. Always be cogniscent of the fees which can add up to more then the out performance of the indices very quickly.

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