investors are always trying to invest in different financial tools to enhance their earnings, adjust risk, overcome market downturns, and diversify their portfolios. Diverse investment options can help you fulfill different types of goals. They can suit varying risk appetites, investment horizons, likings, and needs. Therefore, it helps you understand how several financial tools work and how they can benefit you and your goals.
Mutual funds and index funds are two such investment options that may be seen as similar funds, but they have some differences. Find out what these are and if they are suitable for your needs.
| Points of difference | Mutual funds online | Index funds |
| Meaning | Mutual funds gather funds from several investors and invest them further. The fund house is managed by a fund manager who buys and sells on behalf of investors to garner high returns. Mutual funds are of different types, such as debt funds, equity funds, etc. | Index funds follow a different approach from mutual funds. An index fund typically follows a benchmark index and aims to mimic the performance of this index. An index fund can either be a mutual fund or an exchange-traded fund. |
| Investment objective | The main aim of mutual funds is to beat the returns of a related benchmark index. | The main aim of an index fund is to match the investment returns of a benchmark index. |
| Investment approach | Mutual funds are actively managed funds where the fund manager takes active buying and selling decisions to earn better returns. | Index funds are passively managed funds that only copy the benchmark index. An index fund does not have a fund manager and is automated. |
| Costs involved | Mutual funds online can have a higher expense ratio as they are actively managed. | Since index funds are passively managed, they have lower associated costs and lower expenses ratios. |
| Suitability | Mutual funds can offer higher returns as they aim to outperform the market. They can be ideal if you seek higher returns. | Index funds never outperform the benchmark that they follow. As a result, the returns may be restricted and not as high as mutual funds. However, since they are less volatile, they are perfect for low-risk investors. |
To sum it up
The decision to invest in mutual funds and index funds can depend on a host of factors, and it may be advised to consult a professional financial advisor before you make a call. The two products follow different investment styles and can suit different needs and preferences. However, both options involve some amount of risk and can offer decent returns. If you want to explore different indexes and SIPs, you can use the Tata Capital Moneyfy app to explore and choose the one that suits your investment needs.
