What are Index Funds and Mutual Funds?
written_by SingSaver Team
updated: Mar 24, 2025
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Saver takeaways
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Index funds in Singapore track market benchmarks like the STI, aiming for market-average returns. Active mutual funds strive to outperform these benchmarks, but success varies.
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Active mutual funds in Singapore typically incur higher fees due to active management and research. Index funds offer lower costs, potentially leading to better long-term returns.
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Index fund performance in Singapore is relatively predictable, mirroring the tracked index. Active mutual fund performance is less predictable, depending on what the fund manager's skill and market conditions are.
In essence, index funds are designed to mirror the performance of a specific market index, like the STI, through passive management. Mutual funds, conversely, are actively managed by fund managers who aim to outperform the market by selecting investments.
In Singapore, both index funds and mutual funds are readily available through local platforms and investment options. By grasping the fundamental differences in their management styles and investment objectives, investors can align their choices with their financial goals and risk tolerance.
>> Read: The best mutual funds in Singapore
Index funds vs mutual funds: A comparison
|
Feature |
Index fund |
Mutual fund |
|
Objective |
Match returns of a Singapore benchmark index (e.g., STI). |
Outperform a Singapore benchmark index or achieve specific investment goals. |
|
Holdings |
Stocks, bonds, and other securities listed on the SGX. |
Stocks, bonds, and other securities, potentially including regional assets. |
|
Management |
Passive. Mirrors the composition of the benchmark index. |
Active. Fund manager selects and adjusts holdings. |
|
Examples |
SPDR STI ETF, Nikko AM Singapore STI ETF. |
Lion Global Singapore Fixed Income Fund, Aberdeen Singapore Equity Fund. |
|
Average Expense Ratio |
Typically lower (e.g., 0.1% - 0.5%). |
Typically higher (e.g., 0.5% - 1.5% or more). |
|
Risk Profile |
Market risk associated with the tracked index. |
Varies based on fund strategy and manager skill; potential for higher returns, higher risk. |
|
Accessibility |
Available through SGX brokers, online platforms, robo-advisors. |
Available through banks, fund platforms, financial advisors. |
|
Suitability |
Investors seeking low-cost, diversified exposure to the Singapore market. |
Investors seeking potential for higher returns, willing to pay higher fees, and prefer professional management. |
What are the key differences between mutual funds and index funds?
Passivity vs activeness
Index funds are designed to passively track a specific market index, such as the Straits Times Index (STI) in Singapore or the S&P 500 Index fund. This means their holdings automatically adjust to mirror the index's composition, requiring minimal intervention from fund managers. The goal is to replicate the index's performance, providing investors with market-average returns.
>> Read: The best ways to invest money in 2025
In contrast, mutual funds are actively managed by professional fund managers who make investment decisions based on their analysis and market outlook. They select securities with the aim of outperforming the market or achieving specific investment objectives. This involves ongoing research, analysis and trading, which contributes to higher management fees.
The fundamental difference lies in the approach: index funds aim for consistency and market-matching returns, while mutual funds seek to generate alpha (outperformance) through active management. This distinction affects costs, performance expectations and the level of involvement required from investors.
Goals for investment
Index funds are generally favoured by investors with long-term investment horizons who prioritise consistent, market-matching returns at a low cost. They are ideal for building diversified portfolios and are often used as core holdings in retirement accounts or long-term savings plans. Investors who believe in the efficiency of the market and prefer a hands-off approach tend to gravitate towards index funds.
>> Read: How to set investment goals if you’re a newbie
Mutual funds, on the other hand, cater to investors who seek to outperform the market and are willing to pay higher fees for professional management. These funds are suitable for those who believe that skilled fund managers can identify undervalued assets or capitalise on market inefficiencies. Investors with specific investment objectives, such as focusing on a particular sector or region, may also find mutual funds more appealing.
Ultimately, the choice between index funds and mutual funds depends on an investor's risk tolerance, investment goals and belief in market efficiency. Index funds offer simplicity and cost-effectiveness, while mutual funds provide the potential for higher returns through active management, albeit with greater risk and higher fees.
Total costs
One of the most significant differences between index funds and mutual funds lies in their expense ratios. Index funds, designed to passively track a benchmark index, typically have lower expense ratios. This is because they require much less active management than mutual funds, reducing the need for extensive research and trading activities.
>> Read: A guide to the total fees you incur when investing in stocks
In contrast, mutual funds, which are actively managed, incur higher costs due to the need for skilled fund managers, research teams and frequent trading. These higher operational costs are passed on to investors in the form of higher expense ratios, which can significantly impact how lucrative the long-term returns are.
>> Read: Types of mutual funds in Singapore
For Singaporean investors, understanding these different costs are crucial. Lower expense ratios in index funds can translate to higher net returns over time, making them a cost-effective option for long-term wealth accumulation. Conversely, the potential for outperformance in actively managed mutual funds must be weighed against their higher fees.
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SingSaver Team
At SingSaver, we make personal finance accessible with easy to understand personal finance reads, tools and money hacks that simplify all of life’s financial decisions for you.