Author Topic: Difference between an index fund and a mutual fund?  (Read 4217 times)

lvoevge

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Difference between an index fund and a mutual fund?
« on: January 05, 2015, 01:30:19 PM »
Can someone clear up the difference here? I'm looking on Vanguard and can't figure out the discrepancy.

I have looked primarily at VBINX as Mr. Money Mustache himself recommends. Why is it the best? I think I get it, low expense ratio, low volatility, market average returns, etc. I am a noob, and currently reading The Economist Guide to Investment Strategy which is clearing things up nicely.

How can I understand (in plain English) what happens with a fund such as VBINX?
1. Money deposits each paycheck?
2. Fund grows through dividends and market growth?
3. Monthly/quarterly payouts?

Sorry all, I'm a bit lost here.
« Last Edit: January 05, 2015, 01:34:10 PM by lvoevge »

Mr. Captain Cash

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Re: Difference between an index fund and a mutual fund?
« Reply #1 on: January 05, 2015, 06:05:41 PM »
1) If you had an automatic contribution plan set up each pay cheque would purchase additional VBINX
2) That is the dream that the fund would grow through dividends and market growth.
3) VBINX pays out quarterly dividends

More information can be found here

https://personal.vanguard.com/us/funds/snapshot?FundId=0002&FundIntExt=INT#tab=0


seattlecyclone

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Re: Difference between an index fund and a mutual fund?
« Reply #2 on: January 05, 2015, 06:33:00 PM »
A mutual fund is what you get when an investment company packages up a bunch of different stocks and/or bonds and sells shares of this package to their customers.

Mutual funds can basically fall into one of two categories: actively managed funds or index funds.

Actively managed funds employ a person (or group of people) to make decisions about what stocks to buy, based on their opinions of which ones will do the best in the market.

Index funds just buy shares according to a formula, tracking a particular index.

The S&P 500 is one index, a list of 500 large US companies. Dozens of other indexes exist, for smaller companies, mid-sized companies, all companies put together, international companies, real estate investment companies, and many more. Vanguard has funds that track many of these indexes.

Because index funds invest according to a set formula, they don't need to pay someone to guess which stocks will do better than others, and they often have lower fees as a result.

VBINX is a mix of 60% CRSP US Total Market Index (which represents all US-traded stock weighted by company size) and 40% Barclays U.S. Aggregate Float Adjusted Bond Index (representing a wide variety of US bonds). VBINX isn't a one-size-fits-all "best" fund, but if you think a 60/40 stock/bond ratio makes sense for you, this could be a good fund to invest in.

You're generally right about the mechanics of it.
1) Whenever you have some money to invest, you'll buy more shares of your fund. Each share represents a piece of the overall fund that owns thousands of different stocks and bonds.
2) Every day, the price of a share is reset to reflect the new value of everything the fund holds, based on what happened in the markets that day. When the market goes up, the value of your shares will go up. When the market goes down, the value of your shares will go down.
3) The fund will pay out dividends periodically, based on how much the underlying shares produce in dividends and interest. You can check Google Finance or other sites to see how much the dividends have been in the past. Often you can set up your account so that dividends are automatically reinvested into new shares.

innerscorecard

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Re: Difference between an index fund and a mutual fund?
« Reply #3 on: January 05, 2015, 07:48:51 PM »
A mutual fund is what you get when an investment company packages up a bunch of different stocks and/or bonds and sells shares of this package to their customers.

Mutual funds can basically fall into one of two categories: actively managed funds or index funds.

Actively managed funds employ a person (or group of people) to make decisions about what stocks to buy, based on their opinions of which ones will do the best in the market.

Index funds just buy shares according to a formula, tracking a particular index.

The S&P 500 is one index, a list of 500 large US companies. Dozens of other indexes exist, for smaller companies, mid-sized companies, all companies put together, international companies, real estate investment companies, and many more. Vanguard has funds that track many of these indexes.

Because index funds invest according to a set formula, they don't need to pay someone to guess which stocks will do better than others, and they often have lower fees as a result.

VBINX is a mix of 60% CRSP US Total Market Index (which represents all US-traded stock weighted by company size) and 40% Barclays U.S. Aggregate Float Adjusted Bond Index (representing a wide variety of US bonds). VBINX isn't a one-size-fits-all "best" fund, but if you think a 60/40 stock/bond ratio makes sense for you, this could be a good fund to invest in.

You're generally right about the mechanics of it.
1) Whenever you have some money to invest, you'll buy more shares of your fund. Each share represents a piece of the overall fund that owns thousands of different stocks and bonds.
2) Every day, the price of a share is reset to reflect the new value of everything the fund holds, based on what happened in the markets that day. When the market goes up, the value of your shares will go up. When the market goes down, the value of your shares will go down.
3) The fund will pay out dividends periodically, based on how much the underlying shares produce in dividends and interest. You can check Google Finance or other sites to see how much the dividends have been in the past. Often you can set up your account so that dividends are automatically reinvested into new shares.

Great advice. I'll just chip in also that ETFs are merely another type of mutual fund as well, and thus there are index ETFs too. And to correct one misperception I've seen on here before (especially in that crazy felon porn star thread), ETF dividends are definitely taxable.

lvoevge

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Re: Difference between an index fund and a mutual fund?
« Reply #4 on: January 06, 2015, 07:34:39 AM »
Thanks for all the informative answers. That definitely clears it up. So essentially, since it is a well balanced portfolio, the only way you lose your ass is if the whole market loses its ass? At least on average.

nereo

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Re: Difference between an index fund and a mutual fund?
« Reply #5 on: January 06, 2015, 07:43:37 AM »
Thanks for all the informative answers. That definitely clears it up. So essentially, since it is a well balanced portfolio, the only way you lose your ass is if the whole market loses its ass? At least on average.
IF you are investing in a total-market index.  The VBINX is a balanced fund with 60% stocks (3,300 of the largest US stocks), 40% bonds... so yeah, the entire market would have to go down and you would STILL not loose your ass because you'd ahve 40% bonds.  But, when the stock market rallies (like it did in 2014) it won't go up quite so much because you have 40% in low-preforming bonds.

Another choice would be the VFINX (tracks the SP500) or the VTSMX (tracks the total market).

There ARE index funds that track a very small portion of the market, like just energy companies.  In that case, if oil takes a dive, so does your portfolio. 
"know what you are investing in - have an Asset Allocation (AA)"

Indexer

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Re: Difference between an index fund and a mutual fund?
« Reply #6 on: January 06, 2015, 07:48:37 AM »
Thanks for all the informative answers. That definitely clears it up. So essentially, since it is a well balanced portfolio, the only way you lose your ass is if the whole market loses its ass? At least on average.

If you combine all of VGs big total market index funds(total stock, total bond, total international stock, total international bond) you own just about every publicly traded company in the world and just about every bond in the world.  I like to think about it this way...

Every employee of every company + the taxpayers of all those countries issuing bonds = somewhere around 4-6 BILLION employees(variance is do to me not being sure how much China is represented).  If the world ends you might go belly up, otherwise just expect some volatility in the meantime. 

Also with less than 10k per fund the Vanguard ETFs are normally cheaper than the index funds.  Over 10k per fund you are normally better buying the admiral share of the fund.  The big total market funds/ETFs are also normally their cheapest options as well.  The total stock only costs 0.05%.   I <3 VTSAX!