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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.
How index and active funds differ
|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. Many investors use a mix of index funds and active funds in their portfolios to combine the cost advantage of indexing with the possibility of outperforming the market with active funds. Consider working with an advisor who can help you select the best mix of mutual funds for your portfolio.
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This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. 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 in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.