Index Fund vs Active Mutual Fund: What’s the Difference and Which is Better?
- Share.Market
- 6 min read
- 19 Aug 2025
If you’re thinking of investing but are stuck choosing between index funds and active mutual funds, you’re not alone. It’s one of the most common dilemmas for new investors.
Understanding the difference between an index fund and an active mutual fund is important to make the right decision for your financial goals. While both fall under the mutual fund category, they work differently, charge different fees, and can lead to different returns. In essence, active mutual funds are actively managed, where experts aim to outperform the market, whereas index funds follow a passive strategy, aiming to simply mirror the market’s performance. Let’s break it all down and help you decide which suits you better.
What Are Index Funds?
Definition
An index fund is simply a type of mutual fund that aims to replicate the performance of a specific stock market index, such as the Nifty 50, the Sensex, or the S&P 500. It follows a passive investing approach, meaning the fund manager doesn’t choose stocks. Instead, the fund simply invests in the same companies listed on the particular index.
How it Works
Suppose you put your money in a Nifty Next 50 index fund. That means your money will go into the same 50 companies that are listed in the Nifty Next 50. The fund mirrors the index by purchasing its stocks in the same ratio. As the Nifty Next 50 moves up or down, so will your investment.
Why Consider Index Funds?
- Low Fees: Since the fund manager is not actively picking stocks, the charges are lower.
- Diversification: Index funds give you exposure to passively invest in the whole market or a sector.
- Simplicity: The fund does what the index does. There are no surprises.
Popular Index Funds in India
Many index mutual funds in India copy well-known indices like the Nifty 50 and Bank Nifty, and Sensex. Some even follow foreign indices like the Nasdaq and S&P 500. These funds are offered by asset management companies and are a great choice if you’re after low-cost, consistent returns.
What are Active Mutual Funds?
A mutual fund collects money from many investors and puts it into various financial instruments like stocks and bonds. In an actively managed mutual fund, professional fund managers select investments they believe have the potential to outperform the market, based on research, analysis, and market forecasts.
How it Works
When you invest in a mutual fund, you own a small portion of a larger investment pool. The fund manager uses that money to buy and sell securities based on the fund’s strategy. Your returns depend on how well those investments perform.
Why Consider Active Mutual Funds?
- Professional management: Expert fund managers handle your investments.
- Active strategy: Aim to earn higher returns than the market.
- Flexible options: Equity, debt, hybrid, etc. You will get a fund for every goal.
Popular Mutual Funds in India
All mutual funds in India are regulated by SEBI to safeguard investor interests. Depending on your risk appetite and time frame, you can choose from equity funds, debt funds, hybrid funds, and more.
Index Fund vs Active Mutual Fund: Key Differences
The key differences between an index fund and an active mutual fund are mentioned below:
| Aspect | Index Funds | Mutual Funds |
| Strategy | Passive – Index funds follow the index | Active – Active funds have the ambition of getting more returns than the index |
| Cost | The expense ratio is very low | Higher expense ratio due to fund manager fees |
| Risk | The risks are easier to anticipate and depend on market movements. | Comparatively more volatile since it involves both market risk and manager risk. |
| Returns | Matches Index returns | Can outperform or underperform the index |
Which One Should You Choose?
Go for Index Funds if:
- You are looking for low expense ratios and consistent returns over a longer period.
- You prefer a hands-free style of investing in which you don’t want to spend your time tracking your investments.
Go for Active Mutual Funds if:
- You aim for higher returns and are willing to tolerate more cost and risk.
- You rely on the professionals who manage the fund.
- You’re interested in a variety of assets with single investment concepts like hybrid mutual funds.
Still Not Sure?
If you’re just starting out, index funds are a great way to ease into investing. They’re straightforward, low-cost, and ideal for learning without feeling overwhelmed.
As you grow more confident and set clearer goals, you might want to explore actively managed mutual funds to customise your portfolio.
At Share.Market, we believe in giving you the right tools and information to make smart investing decisions, whether you’re starting with index funds or diving into mutual funds.
How to invest in Mutual Funds and Index Funds
Putting your money in mutual funds and index funds in India is as easy as sending a message using Share.Market.
1. Determine Your Goals for Investment
Figure out why you’re investing – wealth creation, buying a home, retirement, etc. This will help you choose between equity, debt, hybrid, or index mutual funds.
2. Decide How You Want to Invest
You’re free to invest either through a lump sum or a Systematic Investment Plan. SIPs are a great option to start small and build a habit.
3. Complete KYC (Know Your Customer)
Completing your KYC is essential for mutual fund investments in India. The KYC process on Share.Market is not only quick but also digital. Upload your basic details – PAN, Aadhaar, mobile, and other basic details, and you can get started.
4. Browse Share.Market and Find the Fund List
Visit the official Share.Market website or the app to browse through the different Index Mutual Funds in India, as well as actively managed mutual funds. Utilise CRISP, a tool introduced by Share.Market to compare performance, check ratios, and choose between index funds and actively managed options based on your comfort level.
5. Be One of the First People to Invest
Once you’ve selected a fund, decide how much to invest, either via SIP or a lump sum. With Share.Market’s dashboard, you can pause, modify, or stop your investments anytime.
6. Track Your Portfolio
It is recommended that you track your portfolio regularly. Reviewing your portfolio occasionally helps in staying informed and ensures your investments stay on track.
FAQs
1. Should beginners pick active mutual funds or index funds?
Beginners could think of going with index funds to start with. These are funds that follow a certain index and are generally low-cost and suitable for a simple investment method of saving.
2. Can active mutual funds beat index fund returns?
Yes, active mutual funds can beat index fund returns. But it all comes down to the fund manager’s choices.
3. What is a more secure choice – an index fund or an active mutual fund?
In general, those investors who feel safe when they follow the market’s trend choose index funds first. The latter kind of funds involves more risk because there are decisions to be made.
4. Are there any fund managers in index funds?
Yes, these funds are managed, although the manager is not responsible for selecting the stock. Moreover, he is tasked with making sure the fund behaves like the index.
5. Can I invest in index funds regularly via an SIP (Systematic Investment Plan)?
Yes, of course, you can. Moreover, SIPs in index funds are the best method to cost-average your investment and benefit from the growth of the market in the long run.
