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How does an index fund differ from a mutual fund?

Curious about index funds

How does an index fund differ from a mutual fund?

An index fund and a mutual fund are both types of investment funds that pool money from multiple investors to invest in a portfolio of assets, such as stocks, bonds, or real estate. However, the key difference between the two is in how they are managed and their investment strategies.

A mutual fund is actively managed by a professional fund manager who selects investments based on their expertise and research to try to outperform a particular benchmark or market index. They also typically have higher management fees and expenses compared to index funds.

In contrast, an index fund is a passive investment fund that tracks the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. Rather than trying to beat the market, an index fund aims to match the returns of the underlying index it tracks by holding a similar portfolio of stocks or other assets in the same proportions as the index.

Because index funds are passive, they generally have lower management fees and expenses than actively managed mutual funds. Additionally, research has shown that index funds tend to outperform actively managed funds over the long term, in part because they have lower costs and fees.

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