Index Funds are also Mutual Funds but differ from other Mutual Funds in many aspects. Choosing between Index Funds and other types of Mutual Funds can be confusing, but understanding the differences can help you make the right decision.
What are Mutual Funds?
A Mutual Fund pools money from a group of investors and invests it in various securities to provide returns. Depending on the type of fund, the money can be invested in stocks, bonds, or other market securities.
What are Index Funds?
Index funds are Mutual Funds that track the performance of a market index like NIFTY and SENSEX to achieve similar returns.
Benefits of Index Funds
- Low cost: Index Funds have a low expense ratio because they are passively managed and do not require active decision-making by fund managers.
- Reduced risk: They carry lower risk as they are well-diversified and less volatile than actively managed funds.
- Consistent returns: They provide consistent returns over time, making them a stable investment choice compared to some riskier Mutual Fund types.
Differences between Index and Mutual Funds
| Feature |
Index Funds |
Mutual Funds |
| Meaning |
A sub-type of Mutual Funds. |
Covers various types of Mutual Funds, including Index Funds. |
| Management |
Passively managed, follows a market index. |
Actively or passively managed by professional fund managers, depending on the type. |
| Risk Level |
Lower risk due to diversification and low volatility. |
Varies based on fund type. |
| Returns |
Tracks performance of a specific benchmark. |
Can outperform or underperform the market depending on each fund. |
Mutual Funds vs Index Funds: Which is better?
If you want a low-risk Mutual Fund with passive management and relatively stable returns, choose an Index Fund. If you are willing to assume additional risk and expect a higher return, explore actively managed funds like Large cap, Midcap or Flexicap funds.
Objectives of Index Funds
- Track and replicate the returns of a specific market index.
- Minimise expenses with passive management.
- Provide relatively stable returns with lower risk.
Conclusion
You can make informed investment decisions once you understand the differences between Index Funds and Mutual Funds. You can also consider diversifying your portfolio by investing some amount of money in Index and other Mutual Fund types.
Alos Read: Decoding the taxation of Mutual Funds
FAQs
Is it good to invest in Index Funds?
It is good to invest in Index Funds if you want low costs and consistent returns with minimal risk.
What is the main disadvantage of an Index Fund?
The main disadvantage is that Index Funds cannot outperform the market, as they only track an index.
Why choose Index Funds over Mutual Funds?
Index funds have lower fees, reduced risk, and eliminate human bias, making them a reliable choice for passive investors.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
