Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
<<Hola Fools, I have been reading in your site about mutual and index funds, but I am unclear (even with explanations from friends and more reading)as to
the bottom-line definition of each and the differences. Also, are there other terms used to mean index or mutual funds?

Appreciate all you guys do.>>

A question I hear all the time. I'll try to make this as simple (and painless) as possible.

Have you ever heard of the S&P 500 or the Dow Jones Industrial Average?

Each of them is an index. These indicies (plural of index) are concocted by someone to represent certain segments of the economy. It is not so important to know how they go about this. What is important is that you understand that certain companies are picked to be a constituent of an index (kind of like picking players for a baseball team). Now think of the value of the index as the team's batting average. You get the team's batting average by averageing in the batting averages of the individual players. In an index, you average the price of the stock of the companies that make up the index. So, what is an index fund? A fund that invests in the companies that make up the index to such an extant, so that the fund's returns will closely miror the returns on the index. So, if you buy into an S&P 500 index fund, your returns should closely resemble that of the S&P 500 index.

Ok, think of a mutual fund as a fund that need not put its money into any particular stock in any particular index. But, the mutual fund will pick a large selection of stocks, generally, to reduce risk. Different mutual funds have different investment plans and objectives. Some will invest in most tech stocks, some in foreigh stock, etc. Here the investment manager of the fund has wider discretion as to what he buys for the fund as his investments will not be tied to a particular index.

Now why invest in one rather than the other, I'll save that for another post, or you can email me :)

Fool On!
D.P.
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.