Index funds or Index mutual funds are essentially mutual funds in which investments are made in stocks which track a particular index in the stock market.
An index like Nifty 50 or BSE 100. So in a way, they replicate underlying Index.
Differences Between Mutual Funds and Index Funds:
- Index funds can generally come in two forms Index mutual funds or ETFs.
- Index mutual funds are simply mutual fund schemes whose mandate is to invest in underlying index stocks. So, in a way it is a passive investment in underlying index.
- Similar to Mutual funds, Index mutual funds have a daily NAV and can be brought or sold to the Fund house.
- Mutual funds, on the other hand, depending on it stated scheme goals have greater flexibility in changing their portfolio. Hence, these are actively managed funds.
- ETF ( Index funds) track one of the stock indices and are actively traded on the exchange. The price of ETFs hence varies dynamically. ETFs can be bought and sold on the exchange.
Mutual funds vs Index Funds: Conclusion
- Actively managed equity portfolios tend to outperform passive index funds.
- Outperformance can vary over time period and decreases with large time intervals.
So, for now it may be worth paying higher expense ratio for actively managed mutual funds. Since, actively managed mutual funds end up giving better returns.