How are Index Funds different from other Mutual Funds?

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Mutual Funds and Index Funds provide diversification by investing across many stocks. While mutual funds have the flexibility to choose stocks in order to generate returns in line with their stated investment objective, Index Funds track a specific index. Hence Index Funds invest in the same stocks that are included in the index. Since Index Funds don’t take active decision in choosing stocks for their portfolio, they are called passively managed funds.

Index Funds tend to generate average market return while actively managed mutual funds aim to generate alpha (return in excess of their benchmark return) by taking active calls on stock selection for their portfolio. The higher expected return comes at the cost of higher risk as compared to Index Funds that simply follow an index and generate return

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