Which is better index fund or mutual fund?
Nov. 28, 2023, at 3:29 p.m. Index funds are safer as they mirror the returns of popular indexes; mutual funds look to go beyond mirroring, seeking to outperform the market. Buying shares of a fund rather than individual stocks makes it easier to invest.
Generally, if you want to “set it and forget it,” index funds are a good bet. If you want the potential upside of a professionally managed fund or want to show your support for specific industries, like renewable energy, actively managed mutual funds will give you more options.
Index funds are considered one of the smartest types of investments, and for good reason. Investing in index funds has long been considered one of the smartest investment moves you can make. Index funds are affordable, enable diversification, and tend to generate attractive returns over time.
Transparency: Since they replicate a market index, the holdings of an index fund are generally well-known and consistent. Historical Performance: Over the long term, many index funds have been shown to outperform actively managed funds, especially after accounting for fees and expenses.
Index funds seek market-average returns, while active mutual funds try to outperform the market. Active mutual funds typically have higher fees than index funds. Index fund performance is relatively predictable; active mutual fund performance tends to be less so.
Actively-managed mutual funds can be riskier investment options than index funds. With a portfolio manager trying to outperform the market, there's a chance they will make poor decisions that hurt the fund's performance.
The average stock market return is about 10% per year, as measured by the S&P 500 index, but that 10% average rate is reduced by inflation. Investors can expect to lose purchasing power of 2% to 3% every year due to inflation. » Learn more about purchasing power with NerdWallet's inflation calculator.
If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition). To index invest, find an index, find a fund tracking that index, and then find a broker to buy shares in that fund.
Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks. And as we saw, the chances of getting positive returns improve when you give time to your investments.
Do index funds ever lose money?
The point isn't to compare active and passive strategies, but rather to make sure you understand that index funds aren't necessarily safe investments. You can lose money if investments in the index lose value. Since many of those indices are financial markets, you should expect them to go down from time to time.
Are Index Funds Safe Long-Term? The short answer is yes: index funds are still safe in the long term. Only the right index funds are safe. There may be some on the market that you want to avoid.
Over the long term, index funds have generally outperformed other types of mutual funds. Other benefits of index funds include low fees, tax advantages (they generate less taxable income), and low risk (since they're highly diversified).
Disadvantages of Index Funds
Index funds can dilute the possibility of big gains as they are driven by the combined results of a very large basket of assets. Little chance for big short-term gains. As passive investing vehicles, there's little scope for capturing big short-term gains with index funds.
Index funds have become a major force among investors who seek passive index strategies as opposed to active management. Indexing has several benefits including lower costs, broad-based diversification, and lower taxes.
Tracking error may occur in an index fund due to liquidity provisions, index constituent changes, corporate actions etc. This is a major risk in index funds.
What were the top-performing funds? Top of the list by some margin was the JP Morgan Emerging Europe, Middle East & Africa investment trust, with a one-year return of almost 50%. The Amundi Semiconductor ETF comfortably took second place with a one-year return of 43%, well ahead of the iShares Poland ETF at 35%.
| Mutual funds | 1-year return (%) |
|---|---|
| Aditya Birla Sun Life Pure Value Fund | 43.02 |
| Axis Value Fund | 40.16 |
| SBI Long Term Equity Fund | 40.00 |
| HDFC Multi Cap Fund | 40.19 |
- 9 Safest Index Funds and ETFs to buy in 2024. ...
- Vanguard S&P 500 ETF (VOO -1.76%) ...
- Vanguard High Dividend Yield ETF (VYM -1.84%) ...
- Vanguard Real Estate ETF (VNQ -2.77%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT -1.87%) ...
- Consumer Staples Select Sector SPDR Fund (XLP -1.4%)
- High-yield savings accounts.
- Certificates of deposit (CDs) and share certificates.
- Money market accounts.
- Treasury securities.
- Series I bonds.
- Municipal bonds.
- Corporate bonds.
- Money market funds.
What is the 80 20 rule for index funds?
Now, here the ETF returns may make for 80% of your total portfolio returns. In other words, the idea behind the 80/20 rule is that if you focus on the best performing 20% of your investments, chances are they will outperform the remaining 80%.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
One of the main reasons is that some investors believe they can outperform the market by actively selecting individual stocks or actively managed funds. While this is possible, it is not easy, and many studies have shown that the majority of active investors fail to beat the market consistently over the long term.
Even the top investors put their money in index funds.
In fact, a number of billionaire investors count S&P 500 index funds among their top holdings. Among those are Buffett's Berkshire Hathaway, Dalio's Bridgewater, and Griffin's Citadel.
Investing in funds, such as exchange-traded funds and low-cost index funds, is often less risky than investing in individual stocks — something that might be especially attractive during a recession.
