Which is better, mutual funds or index funds?

Mutual funds and index funds generally have very different goals. Actively managed mutual funds aim to outperform their benchmark index. Index funds aim to perform in line with their benchmarks. The vast majority of mutual funds fail to outperform over the long run when you account for their fees. As such, index funds are generally better suited for most investors.

Do index funds double every seven years?

Most index funds track a specific index, such as the S&P 500. The S&P 500 has historically offered nominal returns of about 10% per year. Achieving those returns over a seven-year period would double your money. However, there are no guarantees that you will achieve those returns. Index funds tracking other indexes also will produce different returns over time.

Is the S&P 500 an index fund or a mutual fund?

The S&P 500 is neither an index fund nor a mutual fund. The S&P 500 is a stock index that tracks the performance of about 500 U.S.-based companies that have shown consistent profitability. There are index funds that track the S&P 500.

What is the main disadvantage of an index fund?

The disadvantage of index funds is that there's no opportunity to outperform the index. Your returns will match the index's performance very closely.

Index Funds vs. Mutual Funds: Which Should You Choose?

Unlocking investment potential: Navigating index funds vs. mutual funds for cost-effective diversification

By Adam Levy – Updated Mar 17, 2026 at 11:43 AM EST | Fact-checked by Margo Winton Parodi

Key Points

Index funds are passively managed, aiming to match a benchmark index.
Mutual funds are meant to outperform the indexes they track, with a manager selecting stocks.
Mutual funds may include sales loads and higher taxes due to frequent trading, as well as higher management fees.

Building a diversified portfolio of individual stocks and other assets can be a daunting task for any investor. A simple shortcut is to buy an index fund or mutual fund, which will invest your capital across a variety of securities.

While both can provide the foundation of a diversified portfolio, the differences between them are significant -- and they compound over time. The wrong choice can cost you thousands of dollars in fees and taxes over a long investing career.

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Index fund vs. mutual fund: Which is right for you?

Here's the bottom line before we get into the details:

Choose an index fund if you:

Want to minimize fees and keep more of your returns
Are investing for the long term (5+ years) and don't need a manager to actively adjust holdings
Invest in a taxable brokerage account and want tax efficiency
Are a beginner investor who wants simplicity and broad market exposure

Choose an actively managed mutual fund if you:

Want exposure to less efficient markets (like emerging markets or small-cap niches) where skilled managers can sometimes add value
Are investing through a 401(k) where your index fund options are limited and you need to pick the best available active fund
Have a specific investment objective — like capital preservation or income — that index funds don't cleanly address

Differences at a glance

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What are mutual funds?

A mutual fund pools money from many investors to buy a portfolio of securities designed to meet a specific goal. That goal is usually to outperform a benchmark index by selecting stocks, bonds, and other securities the fund manager believes will produce superior returns. This is called active management.

Mutual funds are bought and sold through the mutual fund company itself, not on a stock exchange. Brokers may have partnerships with certain mutual fund companies, allowing you to buy shares within your brokerage account, but sometimes you'll need to go directly to the fund company. This also means that if you switch brokers, your mutual funds may not transfer.

Trades are processed once per day, after the market closes, at the fund's net asset value (NAV). One practical advantage: mutual funds natively support fractional shares, making it easy to invest an exact dollar amount and stay fully invested.

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What are index funds?

An index fund is a passively managed fund that aims to track, not beat, a benchmark index. The fund manager simply buys the same securities in the same weightings as the index it follows. There's no stock-picking, no research team trying to outsmart the market.

Index funds can be structured as mutual funds or as exchange-traded funds (ETFs). An index fund structured as a mutual fund works exactly like any other mutual fund -- you buy and sell directly through the fund company, trades execute at end-of-day NAV, and fractional shares are supported. An index fund structured as an ETF trades on a stock exchange throughout the day, like a stock.

The key distinction for this article is active vs. passive management, not the fund structure itself.

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Index funds vs. mutual funds: The key differences

There are several differences between a passively managed index fund and an actively managed mutual fund. Here are the most important ones for investors to know before they decide which is best for them.

Goals

An index fund's sole purpose is to match the performance of a benchmark, whether that's the S&P 500, the total U.S. stock market, a sector index, or an international index. It will never beat the market, by design. But it will never badly underperform it either.

An actively managed mutual fund aims to beat its benchmark. The fund manager and their research team analyze companies, economic trends, and market conditions to pick securities they believe will outperform.

The problem: most of them fail to do it consistently. In the 20 years from 2004 through 2024, 92% of fund managers underperformed the S&P 500. And identifying in advance which managers will be the exceptions is, for most investors, practically impossible.

Costs

Both fund types charge an expense ratio, an annual fee expressed as a percentage of your assets. This is where the gap between index funds and actively managed mutual funds is most stark.

Index funds typically charge 0.10% or less. Many broad-market index funds from Fidelity, Vanguard, and Schwab charge 0.03% or less, some charge nothing at all. Actively managed mutual funds, which require a portfolio manager and a team of researchers, typically charge between 0.50% and 1.50% annually, sometimes more.

If you purchase an actively managed mutual fund through a broker, you may also pay a sales load, a commission charged either when you buy (front-end load) or when you sell (back-end load). Many index funds charge no sales load at all.

Taxes

In a tax-advantaged account like a 401(k) or IRA, this distinction doesn't matter, capital gains and dividends are sheltered regardless. But in a taxable brokerage account, the difference is real.

Actively managed mutual funds trade frequently. Every time a fund manager sells a stock at a gain, it triggers a taxable capital gains distribution that flows to all shareholders -- even those who didn't sell any shares that year and may actually be losing money on their position. Index funds, because they trade rarely, generate far fewer of these taxable events.

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The final call

For most investors just starting out, one of the top index funds will be the best choice. It's highly unlikely you'll be able to identify in advance the fund manager who will consistently outperform the benchmark you're trying to invest in. And even if they do outperform, higher fees and taxes eat into any edge.

Unless you have a specific reason to pay the higher fees of an actively managed mutual fund, a genuinely compelling strategy, exposure to a less efficient market, or limited choices in your 401(k), a low-cost index fund will accomplish exactly what most investors need: broad diversification, low costs, and returns that match the market.

The most powerful investing decisions aren't about active vs. passive. They're about starting early, investing consistently, and keeping costs as low as possible.

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Index Funds vs. Mutual Funds: FAQ

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About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

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The Motley Fool has a disclosure policy.

Index Funds vs. Mutual Funds: Which Should You Choose?

Unlocking investment potential: Navigating index funds vs. mutual funds for cost-effective diversification

Key Points

Index fund vs. mutual fund: Which is right for you?