How to Differentiate Between Mutual Funds and Index Funds

Mutual funds and index funds - what are they and how do they fit in with the stock market? These are two investment terms often thrown around with little to no explanation. Index funds are like a subcategory of mutual funds, and are often referred to as index mutual funds. Mutual funds can be categorized into actively managed funds and index mutual funds. Here is a basic description of the two:

Difficulty: Moderately Easy

Instructions

1. Actively managed funds are a pool of investors’ funds used to buy/sell various stocks that the broker expects to generate an above-average return. The success rate of a mutual fund relies heavily on the expertise and risk tolerance of your broker/brokerage firm. These funds’ transactions are usually priced higher due to its active management.

2. Index mutual funds mirror the index of a specific financial market (i.e. S&P 500). They tend to generate average returns for investors. These funds are cheaper than the actively managed funds due to their passive management.

3. As always - research, research, researh any type of mutual fund before you begin investing.