When selecting a mutual fund, one of the decisions is whether to invest in an index fund or actively managed fund. Active or index investing isn’t an either-or proposition. In fact, many mutual fund companies offer both types of funds. Likewise, many investors choose to use both types of funds in their portfolios to pursue different objectives.
About index funds
An index is a selection of investments intended to represent a particular market. 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 indexes 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.
About actively managed funds
An actively managed fund has a portfolio manager or a team of managers through the combination of research, market forecasting, experience and expertise, an actively managed strategy tries to beat a particular benchmark (usually a broad index). In comparison an index fund also has a portfolio manager, but the strategy attempt to match the performance of a particular index, not necessarily beat it.