Mutual funds, which include index funds, pool investors’ money and allow them to participate in the stock market without taking on the risks, costs and research of investing in individual stocks or other kinds of securities. There are differences between index funds and actively managed mutual funds.
A mutual fund is actively managed by a portfolio manager with a team of research analysts and traders.
An index fund is also run by a portfolio manager, but it is considered to be passively managed because it holds the same stocks or other securities as well-known indexes, such as the Standard & Poor’s 500 Stock Index.
Index funds are passively managed, meaning that computers do most of the work. Because there is no portfolio-management team, the cost of investing in index funds is less than that of actively managed funds, according to author Richard Ferri in “All About Index Funds.”
The average cost, or expense ratio, of an actively managed fund is 1.25 percent of fund assets. The average cost of investing in an actively managed fund is 0.25 percent, according to the Motley Fool investment website.
Mutual-fund managers aim to outperform the benchmark index. The performance of an actively managed mutual fund will mostly depend on its manager’s stock or bond picks. The performance of an index fund will track that of the index to which it is benchmarked.
According to the Motley Fool, “The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general.” Because stock index funds generally invest in the broader stock market, they hold the edge.
- "All About Index Funds: The Easy Way to Get Started"; Richard Ferri; 2007
- "Mutual Funds for Dummies"; Eric Tyson; 2010
- The Motley Fool: Mutual Funds: Costs: Expense Ratios
- The Motley Fool: Performance: The Performance of Mutual Funds