Investing in a bundle of funds is one of the most accessible ways to help build a diversified portfolio. Mutual funds and index funds are pooled investments that can offer investors exposure to a wide range of assets, but they differ in areas such as costs, strategy, and performance expectations. Understanding these differences can help you choose the right strategy for your financial goals, especially if you’re planning for retirement or long-term growth. 

Read on to learn more about index funds versus mutual funds. You’ll learn how each works, how they compare, and key distinctions to help you invest with confidence. And when you’re ready to take the next step, Gainbridge has annuity offerings that can help you create a diversified portfolio to achieve your investment goals.

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What is a mutual fund?

A mutual fund is a professionally managed portfolio that pools money from many investors to buy a mix of stocks, bonds, other securities, or a combination of these. When you invest in a mutual fund, you own shares that represent a portion of the overall portfolio – you do not actually own the individual securities within the fund. Professional managers oversee the fund and make investment decisions on behalf of shareholders based on the fund’s overall strategy. 

Some mutual funds are actively managed. In active managed funds, money managers research companies, analyze market trends, and make trades to outperform a benchmark index like the S&P 500. Their goal is to deliver returns above what the broader market provides. Other passive funds can track an index and do no attempt to beat the market. 

Are mutual funds a good investment?

Mutual funds can be a good fit depending on your goals and risk tolerance. Actively managed mutual funds have experienced significant outflows — meaning investors pulled out more money than they put in. Between 2014 and 2021, mutual funds shed $2.1 trillion, followed by another $1.8 trillion in 2022 and 2023. 

One of the primary reasons for mutual funds losing assets under management is the popularity of low-cost exchange traded funds (ETFs). Some mutual fund providers have converted their funds into ETFs to stay competitive. In 2024 alone, 55 mutual funds made the switch, bringing the total to over 100 mutual fund-to-ETF conversions since 2021 with over $100 billion in assets. 

ETFs typically offer lower fees and trading flexibility. You can trade ETFs intraday — any time during market hours — which is something you can’t do with mutual funds. However, mutual funds — especially passive ones — can still serve long-term investors well, particularly in retirement accounts where daily trading isn’t a priority. While mutual funds are losing market share, they remain a viable option when aligned with a clear investment strategy. 

What is an index fund?

An index fund is a passively-managed mutual fund or ETF that tracks or mirrors a benchmark index. It holds the same stocks as the index, in similar or the same proportions. For example, an S&P 500 index fund owns all 500 stocks of the S&P weighted by market capitalization. 

Index funds don’t rely on managers to pick individual assets. They follow a rules-based approach and rebalance periodically to stay aligned with the index. This structure can help keep costs low and minimize portfolio turnover. 

Lower turnover can mean fewer taxable events, making index funds generally more tax-efficient than actively managed alternatives. 

Index vs. mutual funds: 3 Differences

While both types of funds offer diversification, they differ in key areas. 

• Investment strategy: Index funds follow a passive approach and don’t involve stock picking. Some mutual funds are actively managed. In the actively managed funds, professionals use research and analysis to select assets they believe will outperform the market. 
• Investment goal: Index funds aim to match the performance of a specific benchmark. Actively managed mutual funds try to outperform that benchmark using tactical decisions and research. 
• Costs: There’s typically less management and trading with index funds, which tend to have lower expense ratios — the percentage of a fund's assets used to cover its operating expenses. For example, a fund with a 0.10% expense ratio charges $10 per $10,000 invested. Passive funds typically charge expense ratios between 0.02% and 0.20%. Actively managed mutual funds tend to have higher expense ratios, often between 0.50% and 1.00%. 

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Pros and cons of index funds vs. mutual funds

Choosing between index funds and mutual funds depends on your goals, time horizon, and risk tolerance. Many investors seeking diversification as they plan for retirement could benefit by starting with a passive management approach and possibly adding active investment strategies later. 

Index fund pros

Index funds can offer broad exposure with minimal effort.

• Diversification: Index funds can cover broad swaths of the market. For example, the S&P 500 includes major companies that drive the U.S. economy. When you buy an index fund, you can spread your risk across hundreds of stocks. 
• Lower costs: Passive funds typically trade less often and require less oversight. This leads to lower fees and fewer capital gains distributions. 
• Tax efficiency: Low turnover means fewer taxable events. 

Index fund cons 

While they can be relatively straightforward, index funds aren’t always balanced.

• Concentration risk: Some indexes are dominated by a few large companies. As of September 2025, six tech giants — Nvidia, Microsoft, Apple, Alphabet, Amazon, and Meta — account for more than 30% of the S&P 500. That’s three times the weight they held just a decade ago. 
• No chance to beat the broad market: Index funds seek to match the market. If the index declines, your fund does too. 

Mutual fund pros (actively managed)

Actively managed funds offer strategic flexibility and potential upside. 

• Potential market outperformance: Actively managed mutual fund managers aim to beat the market, which is not an easy task. Between June 2024 and 2025, about one-third of 3,200 funds analyzed by Morningstar outperformed their passive peers. For investors who choose well-managed funds, this can lead to higher returns than index funds. 
• Flexibility: Mutual fund managers can respond to market shifts, company news, or broad economic events by adjusting their portfolios. For example, they can choose to own only the strongest stocks in the S&P 500 or another index based on their quantitative or qualitative assessment. 

Mutual fund cons 

Investors have to watch out for higher costs and overlap.

• Higher costs: There’s typically more research, trading, and oversight of actively managed mutual funds, which can lead to higher expense ratios. These costs can erode returns. 
• Concentration risk: Some mutual funds mimic index holdings. For example, a fund focused on artificial intelligence may hold the same top tech stocks already in the S&P 500. This overlap increases the risk of doubling up on the same companies, which can reduce diversification and expose your portfolio to sector-specific volatility.

Are index funds or mutual funds right for you?

Deciding between index funds and mutual funds comes down to your investment philosophy and time horizon. If you have a long-term time horizon of 5 to 10 years or more, a passive investment strategy focused on index funds can offer low costs and potential for consistent performance. When you invest in an index fund, particularly big ones such as one that tracks the S&P 500, you may outperform actively managed mutual funds over time. 

Once your portfolio is established, you may look to add actively managed mutual funds for strategic exposure. Consider fund managers with a clear, sustainable approach — not just trendy themes. Use ETF comparison tools to check for overlap and ensure true diversification. 

A strong strategy can balance cost and performance with conviction. Whether you choose passive, active, or both, make sure each fund aligns with your goals. For personalized guidance, consider utilizing the resources available to you on the Gainbridge website  to help with your unique financial objectives.

Simplify retirement planning with Gainbridge

Many retirees worry they’ll outlive their money in retirement. Having a diversified portfolio of mutual funds and ETFs that strategically blend passive and active management can help grow your savings. But it doesn’t guarantee income. Ultimately, a key to a comfortable, stress-free retirement may be a reliable stream of payments. 

Gainbridge digital-first annuities can help build wealth. They provide a straightforward way to turn a portion of your retirement savings into consistent monthly payments. An annuity can offer peace of mind that your money won’t run out, no matter how long you live. 

Explore Gainbridge today to see how you can combine the growth potential of mutual funds and ETFs with income stability. 

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional.  The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

Diversification does not assure a profit or protect against a loss in declining markets. All investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index.