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Index Funds vs. Mutual Funds
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Michael
Campus 2 Career Intern
Posted December 6, 2022
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Investing in the stock market can be daunting. Deciding where to put your money can be one of the most important decisions in your journey to financial security. It may seem like too much to do research, pick stocks, and check in on your portfolio, so some investors opt to put their money into index funds where you can invest in many stocks all at once, or managed funds where a dedicated professional will pick stocks and do research for you. Many people make use of these products, should you?
What is an index fund?
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Index funds are a type of investment that tracks certain companies on the stock market as a group. Stocks in an index are usually put together because of a common trait. One of the most popular and well known index funds is the Standard & Poor’s 500 Index, more commonly referred to as the S&P 500. The S&P 500 is comprised of 500 of the largest companies on the American stock market. This straightforward criteria means that the index doesn’t need a lot of management and is only meant to match the performance of the assets that the index is made of. Funds like the S&P 500 are often used as performance benchmarks in the financial world because of their strength and consistency of return in the long-run. Investing in these funds usually means low management fees due to their simplicity, which means you, the investor, get to keep more of the money being earned.
What is a mutual fund?
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Mutual funds are an investment that differs from true index funds in that they are actively managed. A dedicated fund manager picks stocks through research to try and maximize gains and minimize losses actively. The goal of a fund manager is to beat the return of an index. A good fund manager will pick stocks, bonds, and other securities and will earn high returns. However, these fund managers cost money; they will usually charge a management fee, take a portion of profits, or both. These fees are usually larger, and it is worth considering whether these fees will be overcome by the return on investment in the fund compared to other investments.
Which should I pick?
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With any investment in the stock market, there is inherent risk. Taking a look at the historic return of an investment is a great way to get a picture of the performance of a fund. Keeping the long term in mind can help put an investor at ease when they decide to try a new investment type.
Sources:
https://www.investopedia.com/terms/i/indexfund.asp
https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp
https://www.investopedia.com/terms/m/mutualfund.asp
https://www.nerdwallet.com/article/investing/index-funds-vs-mutual-funds#:~:text=Index%20funds%20seek%20market%2Daverage,to%20be%20much%20less%20predictable.
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