What's the difference between a mutual fund and an index fund?

Advice Pro · #1 (**permalink**) 07-17-09, 12:10 PM

I've heard that index funds are better, I don't see the difference clearly though!

Stocktrading101 · #2 (**permalink**) 07-17-09, 03:04 PM

http://www.stocktradingtogo.com/2007...lio-with-etfs/

First off ETFs trade like stocks so they are much easier to trade and cost less to purchase and sell.

Secondly and more importantly, the majority of time they have much lower management fees than mutual funds. Take the SPY for example which is the ETF tracking the performance of the S&P 500, it only has a management fee of .09%. That is very cheap to replicate the performance of the overall market vs a mutual fund that would otherwise charge 1, 2, or even 3% or more for the same thing.

PS - To find and research great ETFs I recommend using Morningstar. They offer everything you could want and more as far as fund research so check them out.

stockpicker321 · #3 (**permalink**) 07-25-09, 11:01 AM

I like watching FAS and FAZ

allangering · #4 (**permalink**) 08-18-09, 03:08 AM

mutual funds are like pooled investments of every ones money into one pot that invests in other companies. this allows you to have more for little.
Indexed funds mimic the benchmark.They do exactly what the benchmark does, also known as passive investing. Advantage is that the trade costs are much cheaper because all the portfolio manager is doing is completely replicating the funds benchmark. the opposite of passive is active. active is where the pm tries to beat the benchmark, costs are higher and more riskier it is. But the more risk, the greater the reward.
So within the Mutual Fund, you can have a passive or active equity fund. Indexed Funds can also be in the form of ETFS.

Fredledingue · #5 (**permalink**) 08-18-09, 11:24 AM

There are many mutual funds trading as stock too, often giving a good dividend.
I would say the difference between index and mutual funds are in their area of investment.
Index fonds buy stocks belonging to an index (like the S&P500, BRIC etc) and mutual funds invest in stock acording to their preferences. Some mutual fund are very diversified, some are more specialized in a certain sector or type of investment.