Both types are mutual funds: many people pool money and a fund house invests it. The difference is in how the investments are chosen.
Index funds
An index fund holds the same companies as an index, in about the same proportions. A Nifty 50 index fund holds the 50 companies of the Nifty 50. If the index rises 10%, the fund aims to rise about 10% (a little less because of costs). The difference between the fund and the index is called tracking error. Nobody is picking shares, so the running cost is usually low.
Active funds
In an active fund, a fund manager and a research team decide what to hold and when to sell. The goal is to beat a benchmark index. That work costs money, so active funds usually charge more.
The cost: expense ratio
Every mutual fund charges a yearly fee called the expense ratio, taken from the fund's value. A fund with a 0.2% expense ratio takes ₹200 a year from every ₹1 lakh. One with 1.5% takes ₹1,500. Over many years, the gap can become large because costs compound too.
Direct and regular plans
Most funds come in a direct plan (you buy from the fund house; lower cost) and a regular plan (through a distributor who is paid a commission; higher cost). The same fund, different cost.
What to look at
- Expense ratio: compare similar funds.
- Benchmark: what index the fund says it is compared with.
- Track record: past results over many years, against the benchmark. Past results do not promise future results.
- Factsheet: every fund publishes one, with its holdings and risk level (called the riskometer).
Whether an index or an active fund suits someone depends on their goals and time. We don't recommend any fund. Before relying on someone's fund advice, check their registration on our SEBI check page.