Have you ever looked through a list of managed funds and noticed some have much lower fees than others? Chances are, those cheaper ones are index funds, sometimes called passive funds. And you wouldn’t be alone in noticing this trend. Index investing has exploded in popularity over the past two decades, with giants like the Vanguard Group and BlackRock now managing trillions of dollars globally (as of 2025).

There are plenty of index funds out there, and they each work a little differently. Some are designed to keep costs as low as possible, others zoom in on specific parts of the market, and some give you exposure to the entire market all at once. Instead of betting on just one group of companies, these funds spread your money across hundreds, even thousands, of shares.

So, what does that actually mean for you as an investor? Let’s break it down in plain English.

Actively Managed Funds vs Index: The Basics

Active Investing

• Relies on a fund manager (or private investors) who research, analyse and handpick which securities to buy or sell.
• Fees are higher because you’re paying for their expertise, strategy and ongoing management.

Index Investing

• Aims to replicate the performance of a market index (like the ASX200 or S&P500) by tracking a target index, which serves as the fund’s benchmark index. Index funds have clear investment objectives aligned with their target index.
• The portfolio simply mirrors the index’s holdings and weightings. Most indices are weighted by market cap, so large companies, and sometimes a few large companies, can dominate the index. This can result in tracking error, where the fund’s performance may slightly differ from the benchmark index.
• Index funds hold diversified portfolios designed to replicate the benchmark index.
• Changes only happen at set times or in response to corporate events (e.g. mergers).
• Fees are usually much lower because there’s little hands-on management involved. The expense ratio is a key metric for comparing costs, and index funds typically have lower expense ratios than active funds.

Index Funds: Mutual Funds vs ETFs

When it comes to index fund investing, individual investors can choose between two main vehicles: index mutual funds and index exchange-traded funds (ETFs). Both track a specific index and offer instant diversification, but they have some key differences that can impact your investment experience.

Why Index Fund Investing Has Taken Off:

Lower Fees. One of the biggest benefits is cost. Passive index funds, which are passively managed to track their benchmark indices, are cheaper to run, so the savings are passed on to you. One of the biggest perks of index funds is their cost. Because they’re cheaper to run, you usually pay much lower fees than you would with actively managed funds.

And when it comes to performance, the stats don’t lie, most active fund managers struggle to consistently outperform the market over the long haul. In fact, once you factor in their higher fees, many active funds end up delivering lower returns than simple, low-cost index funds. Take the S&P Index Versus Active (SPIVA) scorecard:

• As of 30 June 2024, 65% of Australian General Equity funds underperformed the index.
• Over longer horizons (3, 5 and 10 years), underperformance rose to 69%, 68% and 82% respectively. And similar trends appear across international markets.

Are index funds good? The strong historical performance and average return of index funds, combined with their cost effectiveness and exposure to a broad range of securities make them a good and suitable investment option for many investors.

With numbers like these it’s easy to see why investors have been moving towards index funds.

The Watch-Outs

That doesn’t mean passive investing is perfect. Here are some things to consider:

• No quality filter: Index funds don’t discriminate between “good” or “bad” companies, they include everything in the index. This can result in index funds becoming concentrated in a few large companies which may increase risk. Unlike investing in individual stocks where you select specific companies, index funds offer broad diversification but may still expose you to risks from heavy weighting in a small number of major corporations.
• No ESG focus: If you care about environmental, social or governance (ESG) factors, index funds won’t exclude companies that don’t meet those standards.
• The market still needs active investors: Passive investing works because there are still active investors buying and selling. If everyone only invested in index funds the system wouldn’t work. Your decision between active and passive investing should be based on your risk tolerance and overall financial situation. Consider your asset allocation across different asset classes, such as stocks and bonds to manage risk and align your portfolio to your investment goals. Remember index funds can generate capital gains and realised capital gains which may have tax implications depending on your investment strategy and account type.

Finding the Balance

So should you go all in on index funds or stick with active management? The answer is there’s no one size fits all. Many investors use a mix. Building diversified portfolios with a combination of index funds and active strategies can help investors achieve their investment goals and support retirement planning.

• Index funds or ETFs are an easy, low-cost way to get wide exposure to the market. You can pick from different types, like bond index funds if you want more stability, or large-cap funds that follow some of the biggest companies around. Each option plays a different role, and knowing how they fit together is what helps you build a balanced portfolio that matches your goals.
• Active strategies for niche areas like smaller companies, property, infrastructure or other specialisation where active management can add value. These can complement a long term strategy focused on broad market exposure.

The Bottom Line

Whether you go active, passive or a mix of both the same golden rules apply:

• Diversify your investments.
• Stay invested for the long term.
• Align your investment objectives with your financial goals so your portfolio is tailored to your needs.

At Insight Wealth Planning, we want to make investing simpler and more personal. It’s not just about hitting financial targets, it’s about building a portfolio that lines up with your goals, your values, and your comfort level with risk.

Wondering how active funds or index funds could work for you? Let’s talk. We’ll walk you through everything, from picking the right investment platform to understanding how ETFs, mutual funds and other options fit together. With the right plan in place, you’ll have access to a broad mix of investments, without the stress of juggling it all yourself.