{"id":49552,"date":"2021-09-22T08:23:00","date_gmt":"2021-09-22T12:23:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=49552"},"modified":"2021-09-23T13:16:41","modified_gmt":"2021-09-23T17:16:41","slug":"index-vs-mutual-funds","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/","title":{"rendered":"Index vs. Mutual Funds: What Is the Difference?"},"content":{"rendered":"\n<p>What are the benefits of investing in a fund? What is the difference between index vs. mutual funds?<\/p>\n\n\n\n<p>Both index funds and mutual funds allow you to invest in a diverse group of investments. The main difference is that index funds invest in a specific group of assets (e.g. S&amp;P 500 stocks), while mutual funds invest a changing list of assets, selected by a fund manager. <\/p>\n\n\n\n<p>In this article, we&#8217;ll explain the difference between index funds and mutual funds: how they work, their benefits, and their disadvantages. <\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\">What Is a Fund? <\/h2>\n\n\n\n<p> A \u201cfund\u201d is a diverse group of investments. When you buy into a fund, you\u2019re actually buying a variety of stocks and bonds, without the hassle of choosing each of them individually.\u00a0So, what is the difference between index vs. mutual funds? <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Active Management: Mutual Funds<\/strong><\/h3>\n\n\n\n<p>A mutual fund is a collection of different investments. Mutual fund managers buy each of those specific investments (using a pool of money contributed by a group of individual investors) depending on what they think will generate the best returns. <strong>We call this \u201cactive management\u201d because an actual human is in charge of picking and choosing where to invest the fund\u2019s money.&nbsp;<\/strong><\/p>\n\n\n\n<p>The benefit of a mutual fund is that each person who buys into it is automatically investing a little bit of money in each of the stocks and bonds that make up the fund. In other words, as an investor, <strong>you get all the benefits of a diverse investment portfolio without having to worry about picking specific stocks yourself<\/strong>. Mutual funds also sometimes produce amazing returns, but that performance only lasts a year or two.<\/p>\n\n\n\n<p>However, actively managed mutual funds have a major downside: fees. We already know that mutual fund managers typically can\u2019t beat the average market returns\u2014so if you invest in a mutual fund, not only will you likely see subpar returns, but you\u2019ll pay significant fees that sap the value of your investment even further. These fees (or \u201cexpense ratios\u201d) are usually 1-2% of assets managed per year. That may not sound like a lot, but those fees compound\u2014which means <strong>a 1% fee can end up reducing your overall returns by a whopping 30% in the long run.&nbsp;<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Passive Management: Index Funds<\/strong><\/h3>\n\n\n\n<p>Thankfully, you can bypass those fees by <a href=\"https:\/\/www.shortform.com\/blog\/should-you-invest-in-index-funds\/\">investing in index funds<\/a>. <strong>Index funds are \u201cpassively managed\u201d because they don\u2019t have a fund manager who chooses which stocks and bonds to invest in. <\/strong>Instead, they use a computer algorithm to automatically invest in all the stocks in a given <em>index<\/em>, which is a section of the stock market (for example, NASDAQ is an index of technology stocks). This means that the value of an index fund will rise and fall in the same pattern as the section of the market that the index represents.&nbsp;<\/p>\n\n\n\n<p>In the short term, index funds might not always match the returns of mutual funds because they track so closely with the wider market. However, <strong>in the long run, passively managed funds are a far better deal because there is no fund manager\u2019s salary to pay, so the fees are much lower.<\/strong> For example, an index fund might have an expense ratio of 0.14% compared to a mutual fund\u2019s 2% expense ratio.To understand how important those low fees are, let\u2019s look at an example. If you invest $100 per month in a mutual fund with a 1% expense ratio and keep that making that monthly investment for 25 years, you\u2019ll pay almost $12,000 more in fees than if you\u2019d invested that same money in an index fund<strong> <\/strong>with a 0.14% expense ratio (assuming the standard 8% return). The more money you invest, the more money you lose to <a href=\"https:\/\/www.shortform.com\/blog\/mutual-funds-fees\/\">mutual fund fees<\/a>. For example, if you initially invested $5,000 in that same mutual fund and contributed another $1,000 each month after that, <strong>after 25 years, you\u2019d pay $126,418 more in fees than you would for an index fund.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What are the benefits of investing in a fund? What is the difference between index vs. mutual funds? Both index funds and mutual funds allow you to invest in a diverse group of investments. The main difference is that index funds invest in a specific group of assets (e.g. S&amp;P 500 stocks), while mutual funds invest a changing list of assets, selected by a fund manager. In this article, we&#8217;ll explain the difference between index funds and mutual funds: how they work, their benefits, and their disadvantages.<\/p>\n","protected":false},"author":7,"featured_media":40375,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[15,31],"tags":[496],"class_list":["post-49552","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-education","category-money","tag-i-will-teach-you-to-be-rich","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Index vs. Mutual Funds: What Is the Difference? - Shortform Books<\/title>\n<meta name=\"description\" content=\"Both index and mutual funds allow you to invest in a group of assets. This article explains the difference between index vs. mutual funds.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Index vs. Mutual Funds: What Is the Difference?\" \/>\n<meta property=\"og:description\" content=\"Both index and mutual funds allow you to invest in a group of assets. This article explains the difference between index vs. mutual funds.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/\" \/>\n<meta property=\"og:site_name\" content=\"Shortform Books\" \/>\n<meta property=\"article:published_time\" content=\"2021-09-22T12:23:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-09-23T17:16:41+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/s3.amazonaws.com\/wordpress.shortform.com\/blog\/wp-content\/uploads\/2021\/06\/understanding-investing.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"750\" \/>\n\t<meta property=\"og:image:height\" content=\"326\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Darya Sinusoid\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Darya Sinusoid\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/\"},\"author\":{\"name\":\"Darya Sinusoid\",\"@id\":\"https:\/\/www.shortform.com\/blog\/#\/schema\/person\/0421cce75bc249b11e2517b3a91f9c46\"},\"headline\":\"Index vs. Mutual Funds: What Is the Difference?\",\"datePublished\":\"2021-09-22T12:23:00+00:00\",\"dateModified\":\"2021-09-23T17:16:41+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/\"},\"wordCount\":668,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#organization\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2021\/06\/understanding-investing.jpg\",\"keywords\":[\"I Will Teach You to Be Rich\"],\"articleSection\":[\"Education\",\"Money\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/\",\"url\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/\",\"name\":\"Index vs. Mutual Funds: What Is the Difference? - Shortform Books\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/index-vs-mutual-funds\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2021\/06\/understanding-investing.jpg\",\"datePublished\":\"2021-09-22T12:23:00+00:00\",\"dateModified\":\"2021-09-23T17:16:41+00:00\",\"description\":\"Both index and mutual funds allow you to invest in a group of assets. 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