5 Investment Strategies For Beginners in 2024 - Newsweek
5 Investment Strategies For Beginners in 2024 · 1. Diversification · 2. Investing in Index Funds · 3. Dollar Cost Averaging · 4. Income ...
index fund
An <anchor>index fund</anchor> is a mutual fund or ETF that tracks the performance of a specific market index. These funds follow a passive form of investing and don’t buy or sell securities very often.
Index Funds vs. Mutual Funds – Newsweek Vault
Index Funds vs. Mutual Funds – Newsweek Vault

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- [Best Cash Back Credit Cards](https://www.newsweek.com/vault/credit-cards/best-cash-back-credit-cards/)
- [Easiest Credit Cards to Get](https://www.newsweek.com/vault/credit-cards/easiest-credit-cards-to-get/)
- [Best Grocery Credit Cards](https://www.newsweek.com/vault/credit-cards/best-grocery-credit-cards/)

- Credit Card Reviews

- [American Express Platinum Review](https://www.newsweek.com/vault/credit-cards/american-express-platinum-review/)
- [American Express Gold Review](https://www.newsweek.com/vault/credit-cards/american-express-gold-card-review/)
- [Capital One Venture X Review](https://www.newsweek.com/vault/credit-cards/capital-one-venture-x-review/)
- [Chase Sapphire Reserve Review](https://www.newsweek.com/vault/credit-cards/chase-sapphire-reserve-review/)
- [Chase Sapphire Preferred Review](https://www.newsweek.com/vault/credit-cards/chase-sapphire-preferred-card-review/)

- Compare Credit Cards

- [Amex Gold vs. Amex Platinum](https://www.newsweek.com/vault/credit-cards/amex-gold-vs-platinum/)
- [Chase Sapphire Preferred vs. Sapphire Reserve](https://www.newsweek.com/vault/credit-cards/chase-sapphire-preferred-vs-chase-sapphire-reserve/)
- [Capital One Venture X vs. Chase Sapphire Reserve](https://www.newsweek.com/vault/credit-cards/capital-one-venture-x-vs-chase-sapphire-reserve/)
- [Chase Sapphire Preferred vs. Capital One Venture Rewards](https://www.newsweek.com/vault/credit-cards/chase-sapphire-preferred-vs-capital-one-venture/)
- [Amex Platinum vs. Chase Sapphire Reserve](https://www.newsweek.com/vault/credit-cards/amex-platinum-vs-chase-sapphire-reserve/)

- Credit Card Guides

- [How To Pick Your First Credit Card](https://www.newsweek.com/vault/credit-cards/first-credit-card-guide/)
- [Guide to Credit Score Ranges](https://www.newsweek.com/vault/credit-cards/credit-score-ranges/)
- [What Is a Good APR for a Credit Card?](https://www.newsweek.com/vault/credit-cards/what-is-a-good-apr-for-a-credit-card/)
- [How Many Credit Cards Should I Have?](https://www.newsweek.com/vault/credit-cards/how-many-credit-cards-should-i-have/)
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- Savings Accounts

- [Best High-Yield Savings Accounts](https://www.newsweek.com/vault/banking/savings/best-high-yield-savings-accounts/)
- [7% Interest Savings Account Rates](https://www.newsweek.com/vault/banking/savings/7-percent-savings-account-interest-rates/)
- [Best Health Savings Accounts](https://www.newsweek.com/vault/banking/savings/best-health-savings-accounts/)
- [Current Savings Account Rates](https://www.newsweek.com/vault/banking/savings/average-savings-account-rates/)
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- Checking Accounts

- [Best High-Yield Checking Accounts](https://www.newsweek.com/vault/banking/checking/best-high-yield-checking-accounts/)
- [Best Business Checking Accounts](https://www.newsweek.com/vault/banking/checking/best-business-checking-accounts/)
- [Best No-Fee Checking Accounts](https://www.newsweek.com/vault/banking/checking/best-no-fee-checking-accounts/)
- [Checking vs. Savings Account](https://www.newsweek.com/vault/banking/checking-vs-savings/)
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- CDs

- [Best CD Rates](https://www.newsweek.com/vault/banking/cds/best-cd-rates/)
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- [Best IRA CD Rates](https://www.newsweek.com/vault/banking/cds/best-ira-cd-rates/)
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- Banks

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- [Average Money Market Account Rates](https://www.newsweek.com/vault/banking/current-money-market-account-rates/)
- [Capital One Bank Review](https://www.newsweek.com/vault/banking/capital-one-bank-review/)
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- Personal Loans

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- [Easiest Personal Loans to Get](https://www.newsweek.com/vault/personal-loans/easiest-personal-loans-to-get/)
- [Best Debt Consolidation Loans for Bad Credit](https://www.newsweek.com/vault/personal-loans/best-debt-consolidation-loans-for-bad-credit/)
- [Tax Refund Loans](https://www.newsweek.com/vault/personal-loans/tax-refund-loans/)
- [All Personal Loans Articles](https://www.newsweek.com/vault/personal-loans/)

- Student Loans

- [Best Student Loan Rates](https://www.newsweek.com/vault/student-loans/best-student-loan-rates/)
- [Best International Student Loans](https://www.newsweek.com/vault/student-loans/best-international-student-loans/)
- [Best Private Student Loans](https://www.newsweek.com/vault/student-loans/best-private-student-loans/)
- [Best Refinance Student Loans](https://www.newsweek.com/vault/student-loans/best-refinance-student-loans/)
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- Business Loans

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- [Best Startup Business Loans](https://www.newsweek.com/vault/business-loans/best-startup-business-loans/)
- [Best Business Loans for Veterans](https://www.newsweek.com/vault/business-loans/best-business-loans-for-veterans/)
- [Best Business Lines of Credit](https://www.newsweek.com/vault/business-loans/best-business-lines-of-credit/)
- [All Business Loans Articles](https://www.newsweek.com/vault/business-loans/)

- Auto Loans

- [Best Auto Loan Refinance Lenders](https://www.newsweek.com/vault/auto/loans/best-auto-loan-refinance-lenders/)
- [TD Bank Auto Loan Review](https://www.newsweek.com/vault/auto/loans/td-bank-auto-loan-review/)
- [Wells Fargo Auto Loan Review](https://www.newsweek.com/vault/auto/loans/wells-fargo-auto-loan/)
- [Get a Car Loan With No Down Payment](https://www.newsweek.com/vault/auto/loans/how-to-buy-a-no-downpayment-car-loan/)
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- Software

- [Best Antivirus Software](https://www.newsweek.com/vault/small-business/best-antivirus-software/)
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- [Best Project Management Software](https://www.newsweek.com/vault/small-business/best-project-management-software/)
- [Best Video Conferencing Software](https://www.newsweek.com/vault/small-business/best-video-conferencing-software/)

- Website Builders

- [Best Website Builders](https://www.newsweek.com/vault/small-business/best-website-builders/)
- [Cheapest Website Builders](https://www.newsweek.com/vault/small-business/best-cheap-website-builders/)
- [Best Free Blog Sites](https://www.newsweek.com/vault/small-business/best-free-blog-sites/)
- [Best Web Design Services](https://www.newsweek.com/vault/small-business/best-web-design-services/)
- [Best Cloud Hosting Services](https://www.newsweek.com/vault/small-business/best-cloud-hosting-services/)

- LLCs

- [Best LLC Services](https://www.newsweek.com/vault/small-business/best-llc-service/)
- [Best States to Form an LLC](https://www.newsweek.com/vault/small-business/best-states-to-form-an-llc/)
- [How To Set Up an LLC](https://www.newsweek.com/vault/small-business/how-to-set-up-an-llc/)
- [How Much Does It Cost To Start an LLC?](https://www.newsweek.com/vault/small-business/forming-llc-cost/)
- [Sole Proprietorship vs. LLC](https://www.newsweek.com/vault/small-business/sole-proprietorship-vs-llc/)

- VPNs

- [Best VPNs](https://www.newsweek.com/vault/small-business/best-vpn/)
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- [Investing](https://www.newsweek.com/vault/investing/)


- Compare Investments

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- Compare Stocks

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- [Best AI Stock to Invest In](https://www.newsweek.com/vault/investing/what-is-the-best-ai-stock-to-invest-in/)
- [Best Growth Stocks](https://www.newsweek.com/vault/investing/best-growth-stocks/)
- [Best Dividend Stocks](https://www.newsweek.com/vault/investing/best-dividend-stocks/)

- Cryptocurrency

- [Best Cryptocurrency](https://www.newsweek.com/vault/investing/best-cryptocurrencies/)
- [Most Popular Cryptocurrencies](https://www.newsweek.com/vault/investing/cryptocurrency/most-popular-cryptocurrencies/)
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- [Best Crypto Exchanges and Apps](https://www.newsweek.com/vault/investing/best-crypto-exchanges/)
- [Best Crypto Credit Cards](https://www.newsweek.com/vault/credit-cards/best-credit-cards-for-crypto/)

- Investing Guides

- [Important Tips for Investing in Stocks](https://www.newsweek.com/vault/investing/stock-investing-top-tips/)
- [Investing Strategies For Stock Market Volatility](https://www.newsweek.com/vault/investing/how-i-use-dollar-cost-averaging-to-navigate-market-volatility/)
- [Types of Investment Accounts](https://www.newsweek.com/vault/investing/types-of-investment-accounts/)
- [Guide to Cryptocurrency Scams](https://www.newsweek.com/vault/investing/cryptocurrency-scams/)
- [Crypto Tips & Tricks](https://www.newsweek.com/vault/investing/cryptocurrency-lessons-learned/)

- [More From Vault](https://www.newsweek.com/vault/)


- Mortgages

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- [What is a Mortgage?](https://www.newsweek.com/vault/mortgages/what-is-a-mortgage/)
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- Home Services

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- [Best Internet Providers](https://www.newsweek.com/vault/home-services/internet/best-internet-providers/)
- [Best Internet Speed Tests](https://www.newsweek.com/vault/home-services/internet/best-internet-speed-tests/)
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- Taxes

- [Best Tax Software](https://www.newsweek.com/vault/taxes/best-tax-software/)
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- Auto

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- [Best New Car Warranty Companies](https://www.newsweek.com/vault/auto/car-warranty/best-new-car-warranties/)
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- [Best Extended Car Warranties](https://www.newsweek.com/vault/auto/car-warranty/best-extended-car-warranties/)
- [All Auto Articles](https://www.newsweek.com/vault/auto/)

- [Credit Cards](https://www.newsweek.com/vault/credit-cards/)
- [Banking](https://www.newsweek.com/vault/banking/)
- [Loans](https://www.newsweek.com/vault/personal-loans/)
- [Small Business](https://www.newsweek.com/vault/small-business/)
- [Investing](https://www.newsweek.com/vault/investing/)
- [More From Vault](https://www.newsweek.com/vault/)

Credit Cards

- Best Credit Cards

- [Best Credit Cards](https://www.newsweek.com/vault/credit-cards/best-credit-cards/)
- [Best Travel Credit Cards](https://www.newsweek.com/vault/credit-cards/best-travel-credit-cards/)
- [Best Cash Back Credit Cards](https://www.newsweek.com/vault/credit-cards/best-cash-back-credit-cards/)
- [Easiest Credit Cards to Get](https://www.newsweek.com/vault/credit-cards/easiest-credit-cards-to-get/)
- [Best Grocery Credit Cards](https://www.newsweek.com/vault/credit-cards/best-grocery-credit-cards/)

- Credit Card Reviews

- [American Express Platinum Review](https://www.newsweek.com/vault/credit-cards/american-express-platinum-review/)
- [American Express Gold Review](https://www.newsweek.com/vault/credit-cards/american-express-gold-card-review/)
- [Capital One Venture X Review](https://www.newsweek.com/vault/credit-cards/capital-one-venture-x-review/)
- [Chase Sapphire Reserve Review](https://www.newsweek.com/vault/credit-cards/chase-sapphire-reserve-review/)
- [Chase Sapphire Preferred Review](https://www.newsweek.com/vault/credit-cards/chase-sapphire-preferred-card-review/)

- Compare Credit Cards

- [Amex Gold vs. Amex Platinum](https://www.newsweek.com/vault/credit-cards/amex-gold-vs-platinum/)
- [Chase Sapphire Preferred vs. Sapphire Reserve](https://www.newsweek.com/vault/credit-cards/chase-sapphire-preferred-vs-chase-sapphire-reserve/)
- [Capital One Venture X vs. Chase Sapphire Reserve](https://www.newsweek.com/vault/credit-cards/capital-one-venture-x-vs-chase-sapphire-reserve/)
- [Chase Sapphire Preferred vs. Capital One Venture Rewards](https://www.newsweek.com/vault/credit-cards/chase-sapphire-preferred-vs-capital-one-venture/)
- [Amex Platinum vs. Chase Sapphire Reserve](https://www.newsweek.com/vault/credit-cards/amex-platinum-vs-chase-sapphire-reserve/)

- Credit Card Guides

- [How To Pick Your First Credit Card](https://www.newsweek.com/vault/credit-cards/first-credit-card-guide/)
- [Guide to Credit Score Ranges](https://www.newsweek.com/vault/credit-cards/credit-score-ranges/)
- [What Is a Good APR for a Credit Card?](https://www.newsweek.com/vault/credit-cards/what-is-a-good-apr-for-a-credit-card/)
- [How Many Credit Cards Should I Have?](https://www.newsweek.com/vault/credit-cards/how-many-credit-cards-should-i-have/)
- [How To Choose a Credit Card](https://www.newsweek.com/vault/credit-cards/how-to-choose-a-credit-card/)

Banking

- Savings Accounts

- [Best High-Yield Savings Accounts](https://www.newsweek.com/vault/banking/savings/best-high-yield-savings-accounts/)
- [7% Interest Savings Account Rates](https://www.newsweek.com/vault/banking/savings/7-percent-savings-account-interest-rates/)
- [Best Health Savings Accounts](https://www.newsweek.com/vault/banking/savings/best-health-savings-accounts/)
- [Current Savings Account Rates](https://www.newsweek.com/vault/banking/savings/average-savings-account-rates/)
- [All Savings Articles](https://www.newsweek.com/vault/banking/savings/)

- Checking Accounts

- [Best High-Yield Checking Accounts](https://www.newsweek.com/vault/banking/checking/best-high-yield-checking-accounts/)
- [Best Business Checking Accounts](https://www.newsweek.com/vault/banking/checking/best-business-checking-accounts/)
- [Best No-Fee Checking Accounts](https://www.newsweek.com/vault/banking/checking/best-no-fee-checking-accounts/)
- [Checking vs. Savings Account](https://www.newsweek.com/vault/banking/checking-vs-savings/)
- [All Checking Articles](https://www.newsweek.com/vault/banking/checking/)

- CDs

- [Best CD Rates](https://www.newsweek.com/vault/banking/cds/best-cd-rates/)
- [Best Jumbo CD Rates](https://www.newsweek.com/vault/banking/cds/best-jumbo-cd-rates/)
- [Best IRA CD Rates](https://www.newsweek.com/vault/banking/cds/best-ira-cd-rates/)
- [Current CD Rates](https://www.newsweek.com/vault/banking/cds/current-cd-rates/)
- [All CD Articles](https://www.newsweek.com/vault/banking/cds/)

- Banks

- [Best Online Banks](https://www.newsweek.com/vault/banking/best-online-banks/)
- [Best Bank Account Bonuses](https://www.newsweek.com/vault/banking/best-bank-account-bonuses/)
- [Average Money Market Account Rates](https://www.newsweek.com/vault/banking/current-money-market-account-rates/)
- [Capital One Bank Review](https://www.newsweek.com/vault/banking/capital-one-bank-review/)
- [All Banking Articles](https://www.newsweek.com/vault/banking/)

Loans

- Personal Loans

- [Best Personal Loans](https://www.newsweek.com/vault/personal-loans/best-personal-loans/)
- [Easiest Personal Loans to Get](https://www.newsweek.com/vault/personal-loans/easiest-personal-loans-to-get/)
- [Best Debt Consolidation Loans for Bad Credit](https://www.newsweek.com/vault/personal-loans/best-debt-consolidation-loans-for-bad-credit/)
- [Tax Refund Loans](https://www.newsweek.com/vault/personal-loans/tax-refund-loans/)
- [All Personal Loans Articles](https://www.newsweek.com/vault/personal-loans/)

- Student Loans

- [Best Student Loan Rates](https://www.newsweek.com/vault/student-loans/best-student-loan-rates/)
- [Best International Student Loans](https://www.newsweek.com/vault/student-loans/best-international-student-loans/)
- [Best Private Student Loans](https://www.newsweek.com/vault/student-loans/best-private-student-loans/)
- [Best Refinance Student Loans](https://www.newsweek.com/vault/student-loans/best-refinance-student-loans/)
- [All Student Loans Articles](https://www.newsweek.com/vault/student-loans/)

- Business Loans

- [Best Online Business Loans](https://www.newsweek.com/vault/business-loans/best-online-business-loans/)
- [Best Startup Business Loans](https://www.newsweek.com/vault/business-loans/best-startup-business-loans/)
- [Best Business Loans for Veterans](https://www.newsweek.com/vault/business-loans/best-business-loans-for-veterans/)
- [Best Business Lines of Credit](https://www.newsweek.com/vault/business-loans/best-business-lines-of-credit/)
- [All Business Loans Articles](https://www.newsweek.com/vault/business-loans/)

- Auto Loans

- [Best Auto Loan Refinance Lenders](https://www.newsweek.com/vault/auto/loans/best-auto-loan-refinance-lenders/)
- [TD Bank Auto Loan Review](https://www.newsweek.com/vault/auto/loans/td-bank-auto-loan-review/)
- [Wells Fargo Auto Loan Review](https://www.newsweek.com/vault/auto/loans/wells-fargo-auto-loan/)
- [Get a Car Loan With No Down Payment](https://www.newsweek.com/vault/auto/loans/how-to-buy-a-no-downpayment-car-loan/)
- [All Auto Loans Articles](https://www.newsweek.com/vault/auto/loans/)

Small Business

- Software

- [Best Antivirus Software](https://www.newsweek.com/vault/small-business/best-antivirus-software/)
- [Best Free Antivirus Software](https://www.newsweek.com/vault/small-business/best-free-antivirus-software/)
- [Best Accounting Software](https://www.newsweek.com/vault/small-business/best-accounting-software/)
- [Best Project Management Software](https://www.newsweek.com/vault/small-business/best-project-management-software/)
- [Best Video Conferencing Software](https://www.newsweek.com/vault/small-business/best-video-conferencing-software/)

- Website Builders

- [Best Website Builders](https://www.newsweek.com/vault/small-business/best-website-builders/)
- [Cheapest Website Builders](https://www.newsweek.com/vault/small-business/best-cheap-website-builders/)
- [Best Free Blog Sites](https://www.newsweek.com/vault/small-business/best-free-blog-sites/)
- [Best Web Design Services](https://www.newsweek.com/vault/small-business/best-web-design-services/)
- [Best Cloud Hosting Services](https://www.newsweek.com/vault/small-business/best-cloud-hosting-services/)

- LLCs

- [Best LLC Services](https://www.newsweek.com/vault/small-business/best-llc-service/)
- [Best States to Form an LLC](https://www.newsweek.com/vault/small-business/best-states-to-form-an-llc/)
- [How To Set Up an LLC](https://www.newsweek.com/vault/small-business/how-to-set-up-an-llc/)
- [How Much Does It Cost To Start an LLC?](https://www.newsweek.com/vault/small-business/forming-llc-cost/)
- [Sole Proprietorship vs. LLC](https://www.newsweek.com/vault/small-business/sole-proprietorship-vs-llc/)

- VPNs

- [Best VPNs](https://www.newsweek.com/vault/small-business/best-vpn/)
- [Fastest VPNs](https://www.newsweek.com/vault/small-business/fastest-vpns/)
- [Best Cheap VPNs](https://www.newsweek.com/vault/small-business/best-cheap-vpn/)
- [Best Mobile VPN](https://www.newsweek.com/vault/small-business/best-mobile-vpn/)
- [Best VPN for Streaming](https://www.newsweek.com/vault/small-business/best-vpn-for-streaming/)

Investing

- Compare Investments

- [Best Investments](https://www.newsweek.com/vault/investing/best-investments/)
- [Best Investment Apps](https://www.newsweek.com/vault/investing/best-investment-apps/)
- [Best Low-Risk Investments](https://www.newsweek.com/vault/investing/low-risk-investments/)
- [Best Short-Term Investments](https://www.newsweek.com/vault/investing/best-short-term-investments/)
- [Best Investments When Interest Rates Go Down](https://www.newsweek.com/vault/investing/best-investments-when-fed-cuts-interest-rates/)

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# Index Funds vs. Mutual Funds

![Jamie Johnson](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

By

[Jamie Johnson](https://www.newsweek.com/vault/authors/jamie-johnson/)

![Jamie Johnson](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

Jamie Johnson

Investing Expert

Jamie Johnson is a Kansas City-based freelance writer. Her work has been featured on several of the top finance and business sites in the country, including Insider, USA Today, Bankrate, Rocket Mortgage, Fox Business, Quicken Loans and The Balance. She covers a variety of personal finance topics including mortgages, loans, credit cards and insurance.

[Read Jamie Johnson's full bio](https://www.newsweek.com/vault/authors/jamie-johnson/)

![Claire Dickey](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

Reviewed By

[Claire Dickey](https://www.newsweek.com/vault/authors/claire-dickey/)

![Claire Dickey](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

Claire Dickey

Senior Editor

Claire is a senior editor at Newsweek focused on credit cards, loans and banking. Her top priority is providing unbiased, in-depth personal finance content to ensure readers are well-equipped with knowledge when making financial decisions.

Prior to Newsweek, Claire spent five years at Bankrate as a lead credit cards editor. You can find her jogging through Austin, TX, or playing tourist in her free time.

[Read Claire Dickey's full bio](https://www.newsweek.com/vault/authors/claire-dickey/)

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Updated August 15, 2024 at 7:53 pm

![Methodology Icon](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)
Our Methodology

Our research is designed to provide you with a comprehensive understanding of personal finance services and products that best suit your needs. To help you in the decision-making process, our expert contributors compare common preferences and potential pain points, such as affordability, accessibility, and credibility.

Choosing a diversified portfolio of stocks and bonds can be difficult, which is why many investors turn to mutual funds and index funds. Both funds invest in a variety of securities and are excellent options for long-term investing.

There are some differences to consider when comparing index funds vs. mutual funds. Index funds track the performance of a market index and are a passive form of investing. In comparison, [mutual funds are a basket of stocks](https://www.newsweek.com/vault/investing/should-you-invest-in-stocks-or-mutual-funds/), bonds and other assets and can be passively or actively managed.

## Vault’s Viewpoint on Index Funds vs. Mutual Funds

- An index fund is a [mutual fund](https://www.newsweek.com/vault/investing/what-is-a-mutual-fund/) or exchange-traded fund (ETF) that tracks the performance of a market index, like the S&P 500.
- A mutual fund lets you pool your money with other investors to buy stocks, bonds and other assets.
- Both index funds and mutual funds can be an excellent addition to your portfolio, but it’s important to understand the differences between the two.

## What Are Index Funds?

An [index fund](https://www.newsweek.com/vault/investing/how-to-invest-in-index-funds/) is an investment fund that tracks the performance of a market index. The S&P 500 and Dow Jones Industrial Average are two popular market indexes an index fund may attempt to track.

Index funds are a type of mutual fund or [exchange-traded fund](https://www.newsweek.com/vault/investing/exchange-traded-fund-definition/) (ETF) and are a passive form of investing. These funds offer broad-market exposure and come with low expense ratios. Index funds are a good choice for investors looking for a largely hands-off, long-term [investment strategy](https://www.newsweek.com/vault/investing/how-i-use-dollar-cost-averaging-to-navigate-market-volatility/).

## Pros and Cons of Index Funds

![plus sign](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

#### Pros

- **Good for beginners:** Since the fund tracks a market index, you don’t have to research [individual stocks](https://www.newsweek.com/vault/investing/bonds-vs-stocks-a-beginners-guide/) and set up the portfolio on your own. This makes index funds a beginner-friendly investing option.
- **Low fees:** Since index funds are passively managed, they come with low fees and expense ratios. This is a crucial point because fees can really add up over time.
- **Tax efficient:** Index funds buy and sell securities pretty infrequently, so you’ll pay fewer [capital gains taxes](https://www.newsweek.com/vault/taxes/capital-gains-tax/).

![x sign logo](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

#### Cons

- **Won’t outperform the market:** Index funds aim to mirror the performance of a certain index, and it won’t outperform the market. This could lead to lower returns over time.
- **Less flexible:** Index funds have less flexibility when it comes to reacting to price declines than non-index funds.
- **Possible tracking errors:** Some index funds may not track the index perfectly, which can affect the fund’s performance.

## How to Choose an Index Fund

Here are the biggest factors to consider when choosing an index fund:

- **Fund size:** The size of the fund is an important consideration since larger funds often come with lower fees and higher liquidity. However, if a fund is too big, it may be less effective at tracking the index.
- **Company size and type:** Different index funds track different types of companies—for example, the fund can track large-cap, mid-cap and small-cap stocks. It can always track U.S.-based or non-U.S. companies and focus on different market sectors.
- **Expense ratio:** Look for a fund with a low expense ratio since this impacts your investment returns. A fund with a 0.4% expense ratio means you’ll pay $40 per year for every $10,000 invested in the fund.

## What Are Mutual Funds?

A mutual fund pools your money with other investors to buy stocks, bonds and other securities. Mutual funds are one of the most popular investing strategies, and as of 2022, over [50%](https://www.statista.com/statistics/246224/mutual-funds-owned-by-american-households/) of U.S. households owned mutual funds.

These funds can be passively managed and track the performance of a market index. An actively managed fund is run by a fund manager who chooses the [investments](https://www.newsweek.com/vault/investing/best-investments/) and monitors the fund’s performance. A well-managed fund could outperform the market, but actively managed funds do come with higher fees.

## Pros and Cons of Mutual Funds

![plus sign](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

#### Pros

- **Potential to beat the market:** A professionally managed fund could outperform the market, leading to significant returns over time.
- **Dividend reinvestment:** If the fund earns dividends, these can be automatically reinvested to help your investment grow even more.
- **Diversification:** Most mutual funds invest in up to hundreds of different securities, which helps reduce your risk so you can create a well-diversified portfolio.

![x sign logo](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

#### Cons

- **Higher fees:** Actively managed funds may come with higher fees that can eat into your investment returns.
- **Potential for mismanagement:** The performance of an actively managed fund largely depends on your portfolio manager. If that person mismanages the fund, it can hurt your returns.
- **Less tax efficient:** Mutual funds have higher turnovers, gains and losses, which will result in paying capital gains taxes. And unfortunately, investors have very little say when it comes to these payouts.

## How to Choose a Mutual Fund

Here are the biggest factors to consider when choosing a mutual fund:

- **Minimum investment:** Many mutual funds require a minimum investment between $500 and $5,000, but you can find funds with no minimum investment requirements.
- **Fees:** Make sure you understand the expense ratios and sales charges before investing in a mutual fund.
- **Management style:** Consider whether you’d prefer an actively or passively managed fund. This will largely depend on your investment goals.

## Investing in Index Funds vs. Mutual Funds

There are similarities between index funds and mutual funds, and many index funds are a type of mutual fund. However, they aren’t the same thing, and there are some important differences between the two.

The following table highlights the biggest differences between a mutual fund and an index fund:

**Index Funds****Mutual Funds****Investment strategy**Attempts to track a market indexAttempts to [beat a market](https://www.newsweek.com/vault/investing/why-i-dont-try-to-beat-the-market/) index**Holdings**Stocks, bonds and other assetsStocks, bonds and other assets**Management style**PassiveCan be passive or active**Fees**Comes with low expense ratiosActively managed funds have higher expense ratios**Best for**Long-term investors or anyone looking for a passive investment strategyAnyone looking to diversify their portfolio

## Index Funds vs. Mutual Funds—Which Should You Choose?

Whether you invest in index funds or mutual funds depends on your investment strategy and risk tolerance. If you’re looking for a [passive investment strategy](https://www.newsweek.com/vault/investing/what-is-passive-income/) that you can set and forget, index funds are probably your best bet.

But if you want to have more flexibility and control over your fund, mutual funds may be the better choice. A well-managed fund could outperform the market and help you earn higher returns on your investment.

> “If you’re looking for a low-cost, passive investing strategy, index funds are the way to go. Mutual funds are better for active investors who want to beat the market.”
>
> — Jamie Johnson

Before investing in any fund, read the prospectus and most recent shareholder report. This information will help you determine that fund’s level of risk, any fees that come with buying or selling and whether it fits with your long-term financial goals.

### Frequently Asked Questions

#### How Long Should You Hold Index Funds?

It’s generally recommended that you hold the fund for at least five years, but longer is better. Index funds are a long-term investment strategy, and you’ll see the best returns on your investment if you hold the fund for at least 10 years. If you’re looking at a shorter timeline than this, you may want to consider another investment strategy.

#### Which Has Lower Expense Ratios—Index Funds or Mutual Funds?

Index funds have lower expense ratios because they’re passively managed. Actively managed mutual funds have higher fees because it has to pay for the fund management, marketing and any administrative costs. This fee will cut into your investment income, so it’s important to know what you’ll be paying for before you invest.

#### Are Index Funds or Mutual Funds Better for Long-Term Investors?

Mutual funds and index funds are both excellent options for long-term investors. Index funds are a better choice for anyone looking for a low-cost, hands-off investing option. In comparison, mutual funds are better for investors looking for opportunities to outperform the market and generate higher returns.

### Related Articles

- [How to Invest in Index Funds](https://www.newsweek.com/vault/investing/how-to-invest-in-index-funds/)
- [How to Invest Money](https://www.newsweek.com/vault/investing/how-to-invest-money/)
- [Best Investments of 2024](https://www.newsweek.com/vault/investing/best-investments/)
- [Best Stocks of 2024](https://www.newsweek.com/vault/investing/best-stocks/)

**Editorial Note:** Opinions expressed here are author’s alone, not those of any bank, credit card issuer, hotel, airline or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post. We may earn a commission from partner links on Newsweek, but commissions do not affect our editors’ opinions or evaluations.

![Jamie Johnson](data:image/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==)

Jamie Johnson

Investing Expert

Jamie Johnson is a Kansas City-based freelance writer. Her work has been featured on several of the top finance and business sites in the country, including Insider, USA Today, Bankrate, Rocket Mortgage, Fox Business, Quicken Loans and The Balance. She covers a variety of personal finance topics including mortgages, loans, credit cards and insurance.

[Read more articles by Jamie Johnson](https://www.newsweek.com/vault/authors/jamie-johnson/)

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