When you are looking for different investment options in the stock market, you may have heard the terms “mutual fund” and “index fund”. While some people use them interchangeably, they are not the same.
There are two types of mutual funds: actively managed mutual funds and passively managed funds.
In actively managed funds, the fund managers try to outperform the benchmark returns. On the other hand, a fund manager of a passive fund follows a specific index, and that is why it is also known as an index fund.
In this blog, you will learn all such information, including their advantages, how you can invest and index vs mutual funds. Let us get started.
Meaning of Index Funds
An Index Fund aims to replicate the performance of a specific stock market index such as the Nifty 50 or BSE Sensex. To do so, the fund managers invest in the same stocks in the index in the same proportions.
The fund managers passively manage these funds, which means the fund manager does not alter the portfolio composition but simply mirrors the securities within the underlying index. The goal is to deliver returns that closely match the performance of the tracked index.
Advantages of Investing in Index Funds
Let us know the advantages of investing in index funds before going deep about index vs mutual funds:
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No Fund Manager Bias
In actively managed funds, the fund manager selects stocks based on personal judgment, which can introduce bias. On the other hand, index funds follow the exact stock composition of a specific market index, which eliminates any bias from the fund manager.
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Lower Costs
Active funds require a team of analysts and frequent trading, which increases the expense ratio. Index funds are cheaper because they track an index and require minimal buying or selling, which leads to lower costs and fees.
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Diversification
Index funds provide exposure to a variety of sectors and reduce the risk of putting all your money into one share. Even if you choose a large-cap or small-cap index, your investment is spread across many companies and sectors.
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Convenient and Professionally Managed
Even though index funds are passively managed, they are still professionally managed to ensure that investments are handled according to the fund’s objectives. They provide an easy and hassle-free way for investors to make long-term, diversified investments in your preferred index.
Easy Steps To Invest in Index Funds
If you want to invest in index funds, you can follow these steps:
- Choose an Index Fund: Start by selecting an index fund that aligns with your investment goals. Decide which index you want to track, such as Nifty 50, Sensex, or Nifty Next 50. Compare different funds based on expense ratio, tracking error and past performance.
- Select an Investment Platform: You can invest directly through mutual fund houses, online platforms such as Torus Digital, banks, or stockbrokers for ETFs. It is best to choose direct mutual funds over regular funds to save your expense ratio.
- Create a Demat Account and Complete KYC: For the first time, you have to create a Demat account and submit identity proof, address proof, and a photograph. This can be done online seamlessly through Torus Digital.
- Choose Investment Type: There are two different ways to invest in an index fund– a lump sum investment or a Systematic Investment Plan (SIP) for regular contributions. If you are looking for a long-term investment, you may prefer SIP.
- Place Your Order: You can place a new SIP or lumpsum investment order anytime. In SIP mode, you can edit, cancel or modify your SIP amount and dates anytime.
Meaning of Mutual Funds
Before diving into the comparison between index vs mutual funds, it is essential to understand what mutual funds are. It is an investment option managed by professionals which gathers money from multiple investors to create a pool to invest in a diversified portfolio of assets, including stocks, bonds, or money market instruments.
This pooled investment strategy allows investors to benefit from expert management and diversification and also to minimise risk. The income generated by the fund is distributed to investors in proportion to their holdings, based on the fund’s Net Asset Value (NAV).
Advantages of Mutual Funds
These are the advantages of investing in mutual funds for investors:
- Compounding Benefits: By investing in growth mutual funds, your investment amount will grow over time, enabling wealth accumulation that outpaces inflation. You can do it even with small SIP investments.
- Professional Management: Mutual fund managers offer expertise in stock selection and asset allocation to manage investments effectively with their research and market knowledge.
- Low Costs: You can start SIPs online instantly. Mutual funds have minimal brokerage charges and small expense ratios, which enables retail investors to start with investments as low as ₹100.
- Rupee Cost Averaging: With SIP investments, you can take advantage of rupee cost averaging by purchasing more units when the market is low and fewer units when it is high. It helps to maximise your returns in the long run.
Ways to Invest in Mutual Funds in 2025
If you are looking to invest in mutual funds in 2025, these are multiple channels:
- Mutual Fund Distributors: AMFI-registered distributors offer advice and handle transactions, but the costs are higher for regular plans.
- Direct Investment with AMCs: You can invest directly through Asset Management Companies (AMCs) for lower fees, which is ideal if you are an experienced investor.
- Registered Investment Advisors (RIA): You can invest in direct plans through RIAs but may charge fees for guidance.
- Stockbrokers: Invest through stockbrokers offering mutual fund services.
- Online Platforms: Use trusted platforms like Torus Digital to explore, and invest in various types of mutual funds.
- Bank Wealth Management: Banks provide mutual fund investments, but these are mainly regular plans.
What Are the Difference Between Mutual Funds and Index Funds?
Follow this table to learn the difference between index vs mutual funds:
| Feature | Index Funds | Mutual Funds |
| Objective | Index funds match the returns of a specific market index. | It aims to outperform a benchmark index through active management. |
| Management | Here, fund managers passively manage to mirror a specific index. | Here, your fund managers actively manage your investment and select securities. |
| Holdings | An index fund replicates the index by holding all its securities in the same proportion as the index. | In the holdings, the fund manager invests in a dynamic and varied portfolio of stocks, bonds, or other assets. |
| Expense Ratio | Lower expense ratios due to passive management. | It has higher expense ratios as it requires active management and research. |
| Risk | The risk is lower as your investment is diversified across the index. | It has a higher risk due to stocks chosen by your fund manager. |
Index Funds vs Mutual Funds: Which Is Better for Investment?
Index vs mutual funds– how can you know which is better for your investment goals? It depends on the following factors:
- Investment Goals: If you want steady and long-term growth with minimal involvement, index funds are a better choice. It provides broad, diversified exposure with predictable returns.
If you are looking for higher growth and willing to take on more risk, actively managed funds may suit you better.
- Management Cost: Index funds generally have lower fees due to their passive management, which makes them more cost-effective. This is one of the most important points while discussing index vs mutual funds.
Actively managed funds charge higher fees, which can reduce returns over time, but it is appealing if you are looking for higher returns on your investment.
- Risk Tolerance: Index funds are ideal for low-risk investors as they offer diversification and lower volatility.
Actively managed funds are more volatile and better if you are comfortable with risk and looking for higher returns.
Final Thoughts
Both index funds and mutual funds are ideal investment options if you do not have enough time to research individual stocks. If you are a newbie investor, you can even start with ₹100 SIP.
As discussed above, you have to choose between index vs mutual funds depending on your investment goals. To start your investment journey, it is always best to invest in a direct mutual fund, which generally has a lower expense ratio.
Open your lifetime free Demat account with Torus Digital and start your investment with a wide range of direct mutual funds!
