Index funds and mutual funds are both types of investments, but they are very different.
An index fund is a type of mutual fund, but a mutual fund is not always an index fund. Confused? Here are the details.
What is an index fund?
An index fund tracks a particular stock market index, such as the S&P 500. Index funds are passively managed, meaning the fund manager does not try to outperform the market.
Instead, they try to mimic the index's performance by investing in all (or a representative sample) of the stocks that make up the index.
What is a mutual fund?
A mutual fund is an investment consisting of money from many investors. The money is then invested in stocks, bonds, or other assets.
Mutual funds are actively managed, meaning the fund manager tries to outperform the market by selecting the stocks to invest in.
A mutual fund can track any number of indexes or even buy stocks without following any specific index.
Index fund vs. mutual fund
So what's the difference between an index fund and a mutual fund? Cost and flexibility.
Mutual funds tend to have higher management fees than index funds because they require more active management. Index funds also offer more flexibility - you can invest in them regardless of your investing experience or knowledge level, whereas mutual funds may be more suitable for experienced investors.
ETF vs. mutual fund vs. index fund
An ETF (exchange-traded fund) is similar to an index fund, but there are a few key differences. An ETF tracks a particular index or group of assets like an index fund.
However, ETFs are traded on stock exchanges like regular stocks. You can buy and sell ETFs anytime during the day (unlike mutual funds, which can only be purchased and sold at the end of the day).
ETFs also tend to have lower management fees than mutual funds.
The bottom line
Index and mutual funds are both viable investment options, but it's important to understand their key differences before deciding which is suitable for you.
An index fund may be a good option if you're just starting because it offers lower costs and more flexibility.