Equity Index funds vs Mutual funds

Objective of index funds is to replicate the performance of an index while that of a mutual fund is to beat its benchmark index e.g. S&P500, Russell 3000.

Index funds have lower fees compared to Mutual funds

Mutual funds are actively managed

A very common argument in favour of stock picking is to say that if you just avoid the duds, you would end up with great returns. The problem is it is not easy to avoid the duds. It is not easy for professionals to do who are doing it on a daily basis and even harder for part time dabblers.

Mr Jack Bogle set up the Vanguard Group in 1974 and he is the creator of low cost index funds. The past ~50 years returns have shown that it is extremely tough for Mutual funds managers to beat the index and it is even harder to find and bet on such managers who can beat index consistently over long periods. Active management on Mutual Funds usually has higher cost than passive index funds because of fund manager fees, entry/exit fee etc. The returns are not guaranteed but the fees is guaranteed for as long as you are invested. Fees is calculated on AUM not on the return, thus a small fraction of the money invested is taken as fee every year even when the returns are negative.

A little humility goes a long way in saving your ass and your cash — A simple path to wealth by J.L.Collins

There is also a survival bias in Mutual funds, we only see those funds which have survived. Funds which have had sub-par performance compared to their benchmark index are usually wound up or merged with another successful fund. Thus for the vast majority of investors it is prudent to invest through a low cost instrument such as Index funds

Accidents usually happen when we become greedy and want to have market beating returns when in fact all we need is average returns over long periods of time to reach our financial goals. Spectacular results are obtained by accumulating average returns year after year and not necessarily by earning the highest returns possible. Avoiding mistakes is a far better and prudent strategy to remain in the game than trying to do dangerous stunts such as investing in futures/options and such which can result in being booted out of the game completely.