Index mutual funds match the investment returns of a particular group of stocks, owning only the stocks that make up the corresponding index. They carry lower annual expenses than other types of mutual funds and are a passive investment. Managed mutual funds rely on a fund manager to decide which stocks to own, while index funds aren’t actively managed. John Bogle is considered the “father” of index funds, and many investment firms offer them. Funds that track the S&P 500 index are mutual index mutual funds.
Index mutual funds are stock market investment instruments that seek to match the investment returns of a particular group of stocks, called an index. Index mutual funds own only the stocks that make up the corresponding index and carry lower annual expenses than other types of mutual funds. The fund owns the shares in proportion to each share’s weight in the index. Different indices usually track a particular business segment of the stock market, such as financial institutions or companies based in Europe. Some indices track a broad segment of the market, such as the 500 largest companies, or even the market as a whole.
A mutual fund is a collection of stocks that the fund owns. An investment house forms the mutual fund and sells the fund shares to individual investors. Mutual funds simplify the task of investing in a diverse collection of stocks for individual investors. Rather than trying to buy dozens of stocks to diversify an investment portfolio, an individual investor can invest in an already diversified mutual fund.
The fund management style differentiates index mutual funds from managed mutual funds. A managed mutual fund relies on a fund manager or stock picker to decide which stocks to own and in what ratio to hold them. The fund follows its original target sector, but the fund manager has a lot of leeway in stock selection and stock ratio. The fund manager may attempt to time market corrections by moving the fund’s assets in and out of cash.
An index fund, meanwhile, isn’t actively managed. Instead, because the fund only owns stocks that match the index it attempts to track, the index mutual fund manager doesn’t have to make choices about which stocks to own and in what configuration. An index mutual fund has a much lower operating cost than a managed mutual fund because it does not pay a fund manager to actively manage the fund, and the index fund passes those lower costs on to those investors who own the fund. Managed mutual funds also buy and sell stocks much more often than index mutual funds, which means that actively managed funds incur higher transaction costs than index mutual funds. For these reasons, an index mutual fund is sometimes called a “passive” investment.
In his book Common Sense on Mutual Funds, John Bogle, the founder of the Vanguard Group, presents an in-depth look at the idea of index mutual funds. Investors consider Bogle the “father” of index funds, and Vanguard has offered its investors index mutual funds since its founding in 1974. These days, many different investment firms offer at least a few index mutual funds. Funds that track the S&P 500 index, which is an index that represents the 500 largest stocks in the US stock market, are mutual index mutual funds. Indexes sometimes remove and add some stocks, meaning the index mutual fund has to follow suit, but such changes are rare.
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