Investing in mutual funds is one of the most popular ways to grow wealth over time. One of the major decisions which investors need to make when investing is whether to choose index mutual funds or actively managed funds. Both options have their own benefits and include risk, which makes it essential to learn the difference between them and make the right choice.
This article explores the differences between investment options and helps you choose the best on the basis of your financial goals.
Understanding Index Funds
Index funds are a type of mutual fund that tracks and imitates a specific market index, such as the NSE Nifty or BSE Sensex. The aim is to match the returns of that index without much human intervention. People choose index funds because they are not managed by professionals, so they have lower advisory fees and make it easier for investors to diversify their investment portfolios.
Understanding Actively Managed Funds
As the name suggests, actively managed funds are securities that are managed by professionals more frequently than index funds. These skilled professionals actively select and manage an investor’s assets and outperform the market. Fund managers actively use research and analysis tools to decide whether to buy, sell or hold securities.
Key Differences Between Index Funds and Actively Managed Funds
Let’s understand some of the key differences between the funds and help you make the right investment decision:
- Risk: If you are open to taking on high risk and potentially earning maximum returns, choose actively managed funds. Otherwise, opt for low-risk index mutual funds that provide stable returns.
- Cost: Index funds follow the passive management style, and because of this, they include lower expense ratios and are a cost-effective option as compared to actively managed funds.
- Performance: Index funds aim to imitate the performance of market indexes. On the other hand, actively managed funds aim to outperform the market by making active decisions, but their success is not guaranteed or stable.
- Investment Goals: Investors looking for a long-term stable wealth creation must choose index funds. On the other hand, investors who are looking to earn high returns within a short period of time might benefit from actively managed funds.
- Type of Investors: If you are a first-time investor who is exploring the market and doesn’t have risk tolerance, then choose to invest in index mutual funds. Investors who are experienced and have a high-risk appetite can choose to invest in actively managed funds.
Index Funds or Actively Managed Funds: Which One to Choose?
Choose to invest in index funds:
- If you are a beginner looking to explore the market and want to start with a small amount of money.
- If you are looking to earn stable returns over a long period of time.
- If you have a low-risk tolerance.
Choose to invest in actively managed funds:
- If you are a pro-investor, who wants to expand your horizon and have time to research the market deeply.
- If you want to earn high returns in a short time period.
- If you have a high-risk tolerance.
Final Thoughts
Choosing between index funds and actively managed funds requires careful consideration. You need to analyse your risk tolerance and investing goals. Where index funds are chosen by someone who wants to earn stable returns, has a low-risk appetite and is cost-effective, actively managed funds are chosen by investors who can take on high risk and want to earn high returns quickly.
When looking for a mutual fund app, make sure you choose a trusted one like Bajaj Finserv. Bajaj Finserv offers multiple investment options, allowing you to diversify your portfolio and earn maximum returns. The platform is entirely digital, user-friendly and equipped with advanced safety features.
Before making any decision, use the MF calculator to determine your investment returns, analyse your investment goals clearly, and build your investment portfolios.
