What is better a regular mutual fund or an index fund?

Answer 1

Many investor's prefer index funds because they basically gurantee market returns. Actively managed mutual set investing strategies to try and beat market returns. There is evidence of a very low (sustained) success rate. A new trend in mutual funds are team managed funds that use 2 or more fund managers with different areas of expertise to maintain continuity in the management of the fund and to mitigate manager risk (bias). Another investment vehicle that is similar to an index fund is an exchange traded fund (ETF). ETFs offer advandages to investors who prefer to invest a lump sum, particularly tax advantages. ETFs are tax advantageous in comparison to traditional mutual funds because ETFs rarely have to make capital gains distributions to its holders. This is true for two reasons. First, the funds are not actively managed. That is, the assets of the fund are not actively bought and sold as with traditional mutual funds. The only time that the make up a fund is changed is when the make up of its underlying index changes. Second, the creation/redemption procedure for ETFs is tax efficient. With a traditional mutual fund, when demand for the fund decreases fund managers must sell some of the underlying assets and thus create capital gains for the investors who continue to hold the fund. ETFs conversely are set up so that fund managers may trade with investors in the primary market, shares of the ETF for proportionate baskets of its underlying stocks and vice versa to adequately meet the demand for the ETF. With this method of redemption, low capital gains are realized and thus a lower tax burden to investors.


However, as you build your portfolio, it is probably best to gain exposure to several types of investment vehicles, including index funds and other types of mutual funds with different investment objectives.

Answer 2

It's really a personal choice. Some advise against buying an index fund because you're paying fees without a professional portfolio manager making the decisions. The index fund simply mirrors the index upon which it's based, there's not active management to decide what's in it.

With regular mutual funds, you have a portfolio manager actively deciding which stocks, etc. to hold and for how long.

Which one performs better? It all depends. Sometimes it's index, other times it regular funds. The KEY is to choose a fund that YOU feel comfortable with and meets your purpose.

Answer 3

The other person who answered your question did a very good job of answering in an unbiased manner. The only thing that I would add to his response is that index funds have one advantage over actively managed funds and one advantage over ETF's that he didn't mention. Index funds are a better fit than actively manged funds in taxable accounts because of the greater tax efficiency that they possess. Active fund managers are constantly trading in and out of individual holdings and generating capital gains. Index funds, like ETF's do very little trading. They will basically hold on to all their holdings until a stock is removed from or added to the underlying index. This is not a factor in an IRA or other tax deferred vehicle.
The advantage that index funds have over ETF's is the fact that index funds, when well managed, are relatively inexpensive. Again, since they do little trading, their expenses are slight. This savings is passed on to the investor. ETF's are also quite good in terms of fee's but most broker's charge you commissions similiar to stock purchases when buying/selling ETF's. Obviously you can use online brokers to reduce your commissions but if that isn't an option the commissions can add up. I hope this helps. Good luck.

Answer 4

I vote for an S&P500 index fund. it is going to reflect the returns of the accurate 500 businesses on the inventory marketplace. The price ratios are low and they are basic to get into. they could under no circumstances out carry out the inventory marketplace yet neither do distinctive heavily managed money with larger prices.