Index funds vs. actively managed funds

When selecting a mutual fund, one of the decisions you’ll face is whether to invest in an index fund or an actively managed fund. Active or index investing isn’t an either-or proposition. In fact, many mutual fund companies offer both types of funds, and many investors choose to use both types of funds in their portfolios to pursue different objectives.

What is an index fund?

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor's 500 Index (S&P 500). Indexes like the Dow Jones Industrial Average and the Standard & Poor’s 500 (S&P 500) make an appearance on the news every night. Other index funds represent markets that are less well known. Index funds are based on indexes that track the performance of a particular market or investment style, such as growth or value.

What is an actively managed fund?

An actively managed fund has a portfolio manager or a team of managers who try to beat a particular benchmark (usually a broad index). These experienced managers work to achieve this goal by handling all the day-to-day decisions such as buying, selling and researching investment opportunities for actively managed funds. In comparison, an index fund also has a portfolio manager, but the strategy is to attempt to match the performance of a particular index, not beat it.

Active vs. index funds

Index funds
Simplicity, low costs and exposure to a market without having to do research to select an active manager
No opportunity to outperform the market index or avoid components of the index that may perform poorly
Active funds
Opportunity to outperform the market depending on the manager you select and the fees charged
May underperform the index if the manager makes poor selection decisions or if higher fees cut into performance

How to choose

Deciding which type of fund to buy doesn’t need to be an either-or proposition. Many investors use a mix of index funds and actively managed funds in their portfolios to combine the cost advantage of indexing with the possibility of outperforming the market with active funds.

Managed Accounts

Investing often requires time and expertise. No matter how much you know, sometimes you need a little help. You might want to consider having professionals engage on your behalf. Managed accounts offer a personalized approach that’s designed to help you feel confident your portfolio is aligned to your goals and investment style. Depending on the complexity of your financial situation, a TIAA financial professional will work with you to construct a well-diversified portfolio that suits your unique needs, wants and wishes.

As always, TIAA financial professionals can help you determine which approach or combination of approaches may be right for your portfolio.
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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.