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Index Funds Vs Mutual Funds - Investment - Nairaland

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Index Funds Vs Mutual Funds by Okfiscal(m): 1:49am On May 25
When you look at recent history, actively managed funds have performed poorly compared to index funds. According to Morningstar, two-thirds of large-cap growth stock mutual funds underperformed the index, and nearly three-quarters of large-cap blended funds failed to match their benchmark. The same was true in 2014, when 86% of active large-cap fund managers fell short of their benchmarks.
In this article we look at (almost) if not everything about an index fund and mutual funds.
Hint to what we cover in this post;
•What is an index fund
•How an index fund works
•Type of index fund
•Why you should invest in an index fund
•Advantages and disadvantages of an index fund
•Statistical example of an index fund in real-world
•What is a mutual fund
•How a mutual fund work
•Type of mutual fund
•Advantages and disadvantages of a mutual fund
•Statistical examples of a mutual fund to real-world
Then we will move further to this discuss the differences between index funds and mutual funds.
So don’t leave this page in a hurry!!!
Now, let’s start the discussion
What is an index funds?
An index fund is a mutual fund or ETF whose portfolio is designed to replicate a certain market index.such as the Standard & Poor’s 500 Index (S&P 500).
Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts. Legendary investor Warren Buffett has recommended index funds as a haven for savings for the sunset years of life. Rather than picking out individual stocks for investment, he has said, it makes more sense for the average investor to buy all of the S&P 500 companies at the low cost an index fund offers.
An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds follow their benchmark index no matter the state of the markets.
How an index funds works
An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.The idea is that by mimicking the profile of the index—the stock market as a whole, or a broad segment of it—the fund will match its performance as well.
There is an index, and an index fund, for nearly every financial market in existence. In the U.S, the most popular index funds track the S&P 500. But several other indexes are widely used as well, including:
the Dow Jones Industrial Average (DJIA) consisting of 30 large-cap companies
the Wilshire 5000 Total Market Index that is the largest U.S. equities index
the MSCI EAFE consisting of foreign stocks from Europe, Australasia, and the Far East
the Barclays Capital U.S. Aggregate Bond Index following the total bond market.
For example, the popular Dow Jones Industrial Average (DJIA) is an index that consists of 30 large U.S. stocks, weighted by share price. So an index fund that tracks the DJIA would be expected to own all 30 stocks in approximately the same proportions that they make up in the index.
Types of index funds
there are different tyes of stock index funds which includes;

1.Broad market index funds: These invest in an index designed to track the performance of the entire market, or a subset of the market such as large-cap stocks. The Dow Jones Industrial Average, S&P 500, and Russell 2000 indices, are examples.
2.Global/International index funds:These are designed to provide exposure to stocks all over the world. Global indices include stocks from all over the world, while international indices exclude U.S.-based companies.
Sector-specific index funds : These are designed to track a sector’s performance. For example, the Financial Select Sector SPDR ETF (NYSEMKT: XLF) is designed to mirror the performance of the banking, insurance, and real-estate industries.
Why invest in index funds?
Index funds have become quite popular, and for good reason. First, because index funds don’t require much effort from managers, they typically have lower fees than actively managed funds. It’s not uncommon to find index funds with expense ratios in the 0.05%-0.07% range, while actively managed funds are generally in the 1%-2% ballpark.
Additionally, index funds allow investors to harness the long-term potential of the stock market without the guesswork and research involved with choosing individual stocks. In fact, there are many economists who believe in the efficient market hypothesis — which says that it’s not possible to beat the market consistently, so the best way to invest is to simply buy all stocks. An index fund allows investors to do that.

Advantages of index funds:

Lower Costs

One primary advantage that index funds possess over their actively managed counterparts is the lower management expense ratio. A fund’s expense ratio—also known as the management expense ratio—includes all of the operating expenses such as the payment to advisors and managers, transaction fees, taxes, and accounting fees.

Since the index fund managers are simply replicating the performance of a benchmark index, they do not need the services of research analysts and others that assist in the stock-selection process. Managers of index funds trade holdings less often incurring fewer transaction fees and commissions. In contrast, actively managed funds have bigger staffs and conduct more transactions, driving up the cost of doing business.

The extra costs of fund management are reflected in the fund’s expense ratio and get passed on to shareholders. As a result, cheap index funds often cost less than a percent—0.2%-0.5% is typical—compared to the much higher fees actively managed funds command—typically 1% to 2.5%.

Other pros are;

• Ultimate in diversification

• Low expense ratios

• Strong longterm returns

• Ideal for passive, buy-and-hold investors.

Disadvantages of index funds

• Vulnerable to market swings, crashes

• Lack of flexibility

• Limited gains

Statistical example of an index fund in real world
Index funds have been around since the 1970s. The popularity of passive investing, the appeal of low fees, and a long-running bull market have combined to send them soaring in the 2010s. For 2018, according to Morningstar Research, investors poured more than US$458 billion into index funds across all asset classes. For the same period, actively managed funds experienced $301 billion in outflows.
The one fund that started it all, founded by Vanguard chairman John Bogle in 1976, remains one of the best for its overall long-term performance and low cost. The Vanguard 500 Index Fund has tracked the S&P 500 faithfully, in composition and performance. It posts a one-year return of 9.46%, vs. the index’s 9.5%, as of March 2019, for example. For its Admiral Shares, the expense ratio is 0.04%, and its minimum investment is $3,000.

What is a mutual funds?
A Mutual Funds is an investment vehicle made up of a pool of funds collected from numerous investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual Funds are operated by professional fund managers, who invest the fund’s capital and attempt to produce capital gains and income for the investors.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.
How a mutual fund works
[url]continue reading https://okfiscal.com/how-to-differentiate-index-funds-from-mutual-funds/[/url]

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