Language

Call us

/content/dam/tataaialifeinsurancecompanylimited/navigations/new-call-us/Close.png

starFOR EXISTING POLICY

Have query on premium, payout or any servicing need?

Dedicated NRI Helpdesk:

Call Icon +91 22 6251 9966

Monday - Saturday | 10 am - 7 pm IST
Call charges apply

Plus IconFOR NEW POLICY

Want to buy a new policy online?

For Indian Residents

Call Icon +91 22 6984 9300

Give missed call for a call back:

Call Icon +91 11 6615 8748

Monday - Sunday | 8 am - 11 pm IST

Exclusively for NRIs

Initiate Internet Call

Data charges may apply

Give missed call for a call back:

call +91 11 4473 0242

Available All Days | 24 x 7

Back Arrow Icon
Close Button
Back Arrow Icon
Close Button

Need assistance in choosing the right insurance plan? Get a call from our Expert.

Need assistance in choosing the right insurance plan?Get a call from our Expert.

+91 dropdown arrow

Select Plan dropdown arrow
  • Term plans
  • Saving plans
  • Wealth plans
  • Retirement plans
  • I don't know/I need help

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in. T&C apply.

Index Funds vs. Mutual Funds: What is the Difference?

There are a number of investment options available for you to choose but getting your hands on a suitable one can take some time and effort. Most investors, whose risk profile allows them to choose investments other than life insurance and have a policy may choose to opt for mutual fund investments. However, mutual funds can be a little complex to understand.
 

For instance, take the difference between index funds and mutual funds. Though these two investment products do have some stark differences, they can appear to be the same instrument for many. Seasoned investors who regularly opt for mutual funds or index funds as their investment vehicle can tell these two products apart – so this a short guide if you are still learning about the differences.
 

What is a Mutual Fund?
 

Simply put, a mutual fund investment collects and pools the finances from many investors and then allocates these funds to different securities such as bonds, stocks, and so on. Since an experienced fund manager picks these investments for the mutual fund on behalf of the investors, mutual funds are actively managed funds. Mutual fund units are known as mutual fund shares and can be redeemed and sold at the existing Net Asset Value (NAV) per share as given on the date of redemption.
 

In a mutual fund, the investment allocation can be diversified between all the securities or also be concentrated on one category of assets, which happens in the case of large-cap funds. When the asset allocation is concentrated in high-risk securities like stocks and other market securities, the mutual fund is said to carry a higher risk.
 

What is an Index Fund?
 

The major confusion that many new investors face with index funds is that index funds are actually a type of mutual fund. However, an index fund replicates a market index in terms of the portfolio and asset allocation and, therefore, aims to match the market index's performance. Index funds are relatively new to the Indian market but are catching on fast as investors are learning quickly about all their available investment options.
 

Unlike a mutual fund, an index fund cannot be customised, and different securities cannot be hand-picked for two main reasons – these are passively managed funds, and the function of the index fund is to mirror a market index and, consequently, match its performance. This is also the reason why there is a chance of a tracking error in index funds, meaning a discrepancy between the index fund performance and the market fund.
 

Index Fund vs Mutual Fund
 

Apart from the difference in the definition of these two investment products, here are some more parameters on the basis of which one can differentiate between the two:
 

  • Objective of the Investment:

    An index fund invests in the securities that are part of the market index to replicate and match the returns generated by the index. On the other hand, a mutual fund pools in the funds from different investors under a scheme to maximise the returns an investor will receive.

  • Management of Investment:

    Index funds are passively managed, and no fund manager allocates the funds to different securities. Mutual funds are actively managed by experienced financial professional who chooses the securities and the allocation as per their understanding and knowledge.

  • Investment Flexibility:

    There is no scope of changing the allocation of the funds or the securities in an index fund as the market index is the lead. Mutual funds offer better flexibility since the fund manager can switch the allocation of securities as per their performance to maximise investor returns.

  • Type of Investment:

    An index fund can invest in stocks, bonds, and any other securities that are also a part of the market index. The index fund’s composition and asset allocation match the market index it follows. Mutual funds invest in securities chosen by the fund manager and according to the fund’s objective.
     


The Choice between Index Fund vs Mutual Fund
 

There is one common factor between index funds and mutual funds – investors who do not want to risk carrying out stock market trading activities by themselves opt for either one of the two or even both options.
 

Mutual funds can be a suitable pick for you if you are looking for an investment that offers great flexibility in terms of asset allocation and the choice of securities. Before investing in a mutual fund, you can look into the details of the scheme to understand the risk it carries, what type of securities it invests in, the objective of the scheme, and so on. Active fund management strategies employed by the fund manager can enable short-term capitalisation of gains.
 

Index funds do not offer such an extent of flexibility, but that does not mean investors avoid index funds. It can be a good choice for those who want to steer clear of the risks of actively managed funds. As with any investment, it is advisable to maintain an investment tenure of at least 5 years in an index fund since the market index also highlights stable trends during such a duration. It should be noted that an index fund cannot beat the market index.
 

If you are an investor who wants to opt for mutual funds or index funds, you should be aware of the objectives and risks of both investment options. Hence, you should secure your investments with some low-risk options like life insurance.
 

Conclusion
 

While stock market investments may not be for everyone, there are different ways to benefit from stock market returns. When you invest in a mutual fund or an index fund, you will always be informed of all the direct and indirect risks related to the investment option of your choice so that you can make an informed decision to meet your financial goals.
 

L&C/Advt/2022/Dec/3338

Discover Tailored Financial Planning Solutions to Secure your Future

+91 dropdown arrow
  • +93 Afghanistan

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.


 

Looking to buy a new insurance plan?

Our experts are happy to help you!

+91

Select plan
  • Term plans
  • Saving plans
  • Retirement plans
  • Wealth plans
  • I don't know/I need help

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in

People Like You Also Read

How Can I Earn Rs.100 Per Day?
Read More
Pravasi Pension Scheme For NRIs: Eligibility and Application Procedure
Read More
How to Calculate the Term Plan Premium Amount?
Read More
5 Differences You Must Know Between Savings and Investments
Read More
Get Protection, Investment & Savings With Combo Insurance Plans | Tata AIA Blog
Read More
Are You An Ant or Grasshopper? Money Savings Lesson
Read More
4 Reasons Why Combining Protection with Savings Work
Read More
Investing in a Savings Plan? Here are 5 Critical Things to Consider
Read More
Goal Oriented Savings: Achieve Your Goals with Timely Savings
Read More
How To Inculcate the Value Of Saving In Your Children?
Read More

People Like You Also Read

How Can I Earn Rs.100 Per Day?
Read More
Pravasi Pension Scheme For NRIs: Eligibility and Application Procedure
Read More
How to Calculate the Term Plan Premium Amount?
Read More
5 Differences You Must Know Between Savings and Investments
Read More
Get Protection, Investment & Savings With Combo Insurance Plans | Tata AIA Blog
Read More
Are You An Ant or Grasshopper? Money Savings Lesson
Read More
4 Reasons Why Combining Protection with Savings Work
Read More
Investing in a Savings Plan? Here are 5 Critical Things to Consider
Read More
Goal Oriented Savings: Achieve Your Goals with Timely Savings
Read More
How To Inculcate the Value Of Saving In Your Children?
Read More
Website Logo Image Icon

Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

Are index funds riskier than mutual funds?

No, index funds and mutual funds carry some investment risk of their own since they are two individual investments. However, there may be the risk of a fund manager’s asset allocation decisions which may lead investors to believe that passively managed index funds are less risky.

Can I invest in mutual funds as well as index funds?

Yes, you can choose an index fund and a mutual fund investment as per your risk profile and investment goal. However, be sure to understand the different risks associated with both instruments as well as their objectives before you make the investment.

Disclaimer

  •  Insurance cover is available under the product.
  •  The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.