febstars19

I was wondering what the difference are between these two? Which is better to invest in as a recent college graduate? and also, how do I go about doing this?! If someone knows this, that be great...cuz I haven't the slightest clue and want to start planning out how to invest soon.

ialsohaveadream

Mutual funds are an investment into a variety of funds. Index funds are similar, but tied to a specific index. For example, a Dow index fund will be tied to the rise and fall of the Dow stocks. Dow goes up, your money goes up. Mutual funds have gotten a bit of flak lately for after-hours trading, but there's still some very reputable places out there that manage funds well and don't charge excessive fees.

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zippyjuan

Mutual funds can sell index funds. Some indexes can also be found traded like stocks- such as what are called Spyders- which is a traded S&P 500 share. A mutual fund usually uses a benchmark to measure its performance against- based on the type of fund it is. A large cap fund will use the S&P 500 for instance. They wiil try to guess which stocks will perform best in that group. An index fund will purchase shares of all of the stocks in the index in the same proportion to their market capitalization. Since the content of the index rarely changes (although they do from time to time), an index fund does not trade shares nearly as often (which costs money even to the mutual funds) so they will have lower costs which will help boost return. All the cash they have to have on hand is for redemptions so they typically are more fully invested at any point in time. Less trading will also mean a smaller tax burden on the investor since every time a mutual fund sells shares for a gain, fund members have to pay tax on that gain. Again, this will result in higher returns for an index fund over a managed fund trying to beat the index.

Since an index is comprised of all people buying and selling stocks contained in that index, on average a managed fund can only match the return of the index long term (some will be better, some worse at different points in time than the index). When you factor in the increased costs and taxes, the average index fund will offer a greater return in the long run than managed funds. Look for ones with low expense ratios- some index funds still add their own high fees. Magellan and Vanguard offer good ones.

It is up to you which index funds you want to invest in based on your tolenence of risk and timeframe for your investment. As I said before, there are S&P 500 index funds, Wilshire 5000 index funds (almost the whole market- 5000 different stocks), bond funds (state, corporate, treasury, short term, etc.), international indexes, etc. You get the picture. In general, it is very hard to beat index funds. They can be boring, but offer a better opportunity at lower cost. The key is diversification of assets and investing regularly- in market rises and falls.

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