Howdy Wall St. Willy! Sometime ago you talked to me about Index Funds and Mutual Funds, but what are some of the differences between them?
Index funds are Passively Managed Funds. But when we say mutual funds, we usually refer to Actively Managed Funds.
The main difference is the way they make their investments. Index funds make their investments to mirror their benchmark index without performing any research or analysis. The idea is to give returns that consistently match the return from the benchmark index.
Actively managed funds, however, invest with the aim of beating the market. So, they use research and analysis to make their investments to get returns better than the market.
How about the cost and expense ratios? Are those generally different too?
Yes, they usually are different. Index funds trade very infrequently and don’t need to hire specialized research analysts. So, their costs and expense ratio are very low, usually. They could be as low as 0.05%!
Woah! 0.05% is a really low expense ratio!
Actively managed funds, however, trade quite frequently and hire research analysts. So, their costs and expense ratio are usually high.
Are they different in terms of income tax and other taxes as well?
Yes. Due to their frequent trading, actively managed mutual funds usually result in a higher income tax than index funds.
Well, what asset class do they invest in?
Both actively managed mutual funds and index funds invest in stocks, bonds and other securities.
What should actively managed mutual funds and index funds be used for? Like are their uses different?
Actively managed funds are good for investing in fixed income or debt, while index funds are great for investing in stocks or equities.
Thank you very much for telling me about the differences between Index Funds and Mutual Funds, Wall St. Willy.
You are welcome, Sooper Cooper. Remember, Finance is Your Friend!
Podcast: Index Funds vs Mutual Funds
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
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A comparison of Index Funds and Mutual Funds: The differences between Index Funds and Mutual Funds, cost and expense ratio of Index Funds and Mutual Funds, income tax on Index Funds and Mutual Funds, the asset classes they invest in, what should Index Funds and Mutual Funds be used for.
Show notes and transcript at: https://easypeasyfinance.com/comparison-index-funds-vs-mutual-funds/