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These investments are similar but can be very different. Both pool small investors together to buy a basket of stock and bonds, however the objectives and goals are quite different.

A mutual fund usually is actively managed, which means a fund manager is making changes to the underlying holding throughout the year. The “turnover” rate give an investor an idea how much change occurs in the fund. Objective of the actively managed fund is to beat the underlying index, or benchmark, the fund is comparing its performance too. Most of these funds are expensive, and secondly DON’T beat their benchmarks. Just like a lot of things in life timing is everything, and the same holds true with these funds. When the manager has a good year a huge influx of money will come into the fund and typically this makes the fund managers job harder to duplicate the performance. Very few fund managers these days are worth this cost, and secondly beating the markets returns is very difficult to accomplish over a long period of time.

Index funds are a passive investment in that it holds a fixed set of stocks or bonds just trying to capture market returns. The only time the underlying holdings change is when a company goes through a bankruptcy or merger. These funds are very cheap as the overhead cost is lower compared to a mutual fund that is actively managed. For most people this is a great way to get the exposure to stocks and bonds at a cheaper price, thus allowing you to keep more of your returns!