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The Difference Between Index and Mutual Funds

Index Funds and Mutual Funds

Index and Mutual Funds certainly have their similarities. Both offer a way to diversify your portfolio and both are usually invested into a plethora of stocks that all work towards a common investment goal or strategy. There are, however, some distinct differences between the two, differences that any investor should be aware of when managing their retirement portfolio.

Index Funds

Securities like the Dow Jones Industrial Average and S&P 500, securities that track how businesses crucial to the US economy are performing, are what Index Funds use to make their investment strategies. These indexes are also what is used by the media to determine how the broader market and economy is doing. [1]

Brokers will offer Index Funds that allow an investor to buy into the stocks of many companies that correlate with a specific index. Multiple Index Funds can all track the same index but behave differently in which stocks they purchase and at what amounts. Some funds may filter out entire industries or stocks with certain characteristics in order to meet a specific financial outcome.

Index funds track the market more than they “beat” the market.

Mutual Funds

Mutual Funds can offer more diversification to a portfolio than an Index Fund. Often invested in a changing list of securities, the investment strategies are determined by a Mutual Fund Investment Manager. Index funds, however, often offer less expensive fees.

A Mutual Fund’s goal, unlike an Index Fund, is to “beat” the market. They are actively managed in a way that is designed to meet a set investment goal, whereas Index Funds ebb and flow with the market, passively managed and only changing when the index it’s invested in does. [2]

On average, Index Funds outperform mutual funds over the course of many years, especially when fees are factored in. Those fees, however, can be worth it when certain investment risks are covered and benefits from an increasingly diversified portfolio are incurred.

Optimizing your retirement could include Index Funds, Mutual Funds, or a number of strategies that all work together to maximize your investments and keep your retirement secure. To schedule a complimentary financial review with Moore’s Wealth Management, click here or call our office at 770-535-5000, where a staff-member is awaiting your call Monday through Friday, 9AM to 5PM.

 

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.

Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 actively traded blue chip stocks.  Indexes are unmanaged and do not incur management fees, costs or expenses.  It is not possible to invest directly in an index.

Mutual Fund: (*if IAR is also a registered rep with a Broker/Dealer, mutual fund advertising may need to be filed with FINRA through their Broker/Dealer)

Mutual funds are offered only by prospectus.  Carefully consider the investment objectives, risks, charges, and expenses of mutual funds before investing.  This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing.