1. Actively managed Funds: An actively managed investment fund is a fund in which a manager or a management team makes decisions about how to invest the fundʼs money

2. Passively managed Funds: A passively managed fund, by contrast, simply follows a market index. It does not have a management team making investment decisions.

An Index Fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index. Index funds have lower expenses and fees than actively managed funds. Index funds are an example of a passively managed fund.

1. They mimic or mirror the portfolio of the Index

2. They have lower expense ratio

3. They obviously follow passive investment strategy.

4. They seek to match the risk and returns of the markets.

Instead of active stock picking and market timing like an actively managed fund, in Index Fund the Fund Manager constructs the Portfolio by mirroring the securities of the broader index/indices.

• There is an index, and an index fund, for nearly every financial market in existence. E.g. UTI Nifty Index Fund which tries to mimic NIFTY of NSE
• ICICI Prudential NIFTY Next 50 Index Fund which tries to mimic NIFTY Next 50 Companies which are outside NIFTY 50.

Portfolios of index funds substantially only change when their benchmark indexes change. If the fund is following a weighted index, its managers may periodically re-balance the percentage of different securities to reflect the weight of their presence in the benchmark. Weighting is a method used to balance out the influence of any single holding in an index or a portfolio.

Pros

• Ultimate in diversification
• Low expense ratios
• Strong long-term returns
• Ideal for passive, buy-and-hold investors

Cons

• Vulnerable to market swings, crashes
• Lack of flexibility
• No human element
• Limited gains