What is the difference between actively managed funds and index funds?

Actively managed funds and index funds differ in their investment strategies and goals.

Actively managed funds are managed by professional fund managers who actively buy and sell securities in order to outperform the market. The fund manager researches, selects, and manages a portfolio of individual securities, with the goal of generating returns that beat the benchmark index. This approach is more handson and typically involves higher fees than index funds.

In contrast, index funds are designed to track a particular benchmark index, such as the S&P 500, and replicate its performance. Instead of trying to beat the market, index fund managers seek to match the performance of the index. This is accomplished by buying the same securities in the same proportions as the index, so the fund's returns mirror the index's returns. Index funds are a passive investment strategy, requiring less research and management than actively managed funds, which leads to lower fees for investors.