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.