The world of investment is full of options. There are tons of investment vehicles available in the market to help you meet your varying requirements, be it for wealth creation, capital appreciation, or accumulation of a corpus for your retirement. Regarding investment, two terms can often appear confusing – Mutual Fund Vs Index Fund. In this post, we will walk you through the differences which make these two investment options unique. Let’s get started on our journey of exploring the differences between mutual funds and index funds.
A mutual fund is an investment scheme where money is pooled from different investors to invest in a basket of securities, including equity-oriented instruments, fixed-income securities, and money market instruments. A team of financial professionals manages the fund by allocating the collected money in a set of different securities to help you achieve your desired investment objective. Mutual funds are also often called Actively Managed Funds.
An index fund is a type of mutual fund that invests the money collected from a pool of investors in stocks that are part of a stock market index, such as NIFTY 50, Bank NIFTY, BSE Sensex, etc. These are passively managed funds, as the fund managers do not select different stocks from different industries. They simply invest as per the stock market index composition intended to be followed by the fund.
After knowing the difference between an index fund and a mutual fund, let’s understand how these two investment vehicles work and everything else about these two types of funds.
Mutual funds work similarly to index funds. However, mutual funds are not focused on different stock market indices, unlike index funds. Mutual funds
collect money from different investors and invest it in equities, bonds, money-market instruments, or even a combination of different securities. This is done to cater to varying investment objectives and risk profiles of different investors, such as tax-saving, wealth creation, fixed source of income, etc.
Let’s the help of an example to understand mutual funds better –
Ms. B invests Rs. 10,000 in an ABC Bluechip Fund, an equity-oriented fund. As the name suggests, being a bluechip fund, it invests 99.5% of its assets in large-cap funds and the remaining in mid-cap funds. Now, instead of this fund, if Ms. B had chosen a balanced fund which splits its assets among equity (44.6%), debt (47.6%), and cash (7.8%) instruments.
Index funds follow a stock market index for composition benchmarking. When you invest in an index fund, that money, along with money invested by other investors, gets invested in all securities that are a part of the following index. It is important to note that all investors of a particular index fund share the same investment objective and risk profile.
Let’s understand this better with the help of an example –
Mr. A invests Rs. 10,000 in an index fund that tracks the popular NIFTY 50 index. Now, since this index has 50 shares in its composition, Mr. A’s index fund will also invest in 50 stocks, following an allocation pattern similar to the index.
Due to this inherent nature of index funds, they provide returns matching the returns registered by the index.
Now, after understanding the working of index funds and mutual funds, let me just tell you why investing in these two instruments is important.
Both these funds help you invest per your investment objective and risk appetite. For instance, you can choose an equity-oriented mutual fund if you aim for capital appreciation by undertaking a moderate to a high level of risk. Similarly, if you wish to invest in the top banks of the country, you can choose to invest in an index fund that mimics the Bank Nifty index.
Another advantage offered by these funds is that of liquidity. In an emergency, you can easily liquidate your investment in these funds. However, in the case of tax-saving mutual funds, you would be required to remain invested.
Our online tool, the Jupiter Portfolio Analyser, provides you with a detailed insights report of your portfolio.
The insights report generated by the Jupiter Portfolio Analyser equips you with important details like your portfolio risk and whether it is balanced in terms of different sectors and industries or concentrated over specific ones.
It also tells you if your portfolio beats the returns generated by different market indices. To complement these insights, there is information on any avoidable fees for your mutual fund investment. In a nutshell, Jupiter Portfolio Analyser helps you make an informed investment decision.
To use Jupiter Money’s Portfolio Analyser, you need to send your consolidated mutual funds statement to us at investments@jupiter.money. And we will send you a detailed insights report. This process is fully automated and thus provides you with your insights report instantly.
You can find your consolidated mutual funds statement in your inbox. You will receive it from CAMS with the subject line “Consolidated Account Statement – CAMS Mailback Request”.
As an investor, you must understand the Index Fund Vs Managed Fund. Both are great investment avenues but cater to different investment styles. If you prefer to invest in a fund that follows a well-defined index, you can consider investing in index funds. However, if you wish to invest in a mix of equity, debt, or a combination, then mutual funds could be suitable for you.
If you do not find the CAMS email in your inbox, feel free to write us at investments@jupiter.money.
A direct mutual fund is a mutual fund plan that you buy directly via an online platform such as Jupiter Money without the help of a distributor, advisor, or agent.
NAV stands for Net Asset Value and refers to the combined market value of all the securities that a mutual fund scheme or Index Fund holds minus its liabilities divided by the total number of its units.
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