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Some things that affect the price of auto insurance you can’t do anything about — like your age — and some you might not want to change, like where you live. But by comparing rates, you may be able to figure out how to get cheaper car insurance.

Here are some other considerations.

How to Get Cheaper Car Insurance

Wondering how to lower car insurance costs?

There’s no downside to looking for a lower premium than you’re currently paying on car insurance. If you find out you have a better deal than you thought, you can stick with the company, and premium, you have.

But if you’ve had the same coverage and carrier for years (or even a year), you may benefit from making some changes.

Shop Around and Get Some Quotes

Rates for the exact same coverage can vary from one insurance company to the next—and from one customer to another. So using an online comparison site to shop for a policy and premium based on your specific needs (or your family’s needs) can be a good way to start your search for savings.

The Insurance Information Institute recommends getting at least three price quotes when you’re shopping for a better rate.

You’ll likely see plenty of company names you know when you use a comparison site, but you also may run into some that are less familiar. If you’re intrigued by a company’s rates and coverage options but want more information, you can read consumer reviews online.

You also can check out a company’s financial health with a rating service like AM Best or Standard & Poor’s. And you can contact your state insurance department to ask about any complaints related to a particular insurer.

Once you’ve done some research, you also may want to contact your current insurance provider to see what savings options it might offer to keep you as a customer.

Recommended: How Much Auto Insurance Do I Really Need?

Look for Discounts

When you’re shopping, it’s smart not to overlook the opportunity to save money on your auto insurance premiums with discounts.

Many insurers offer price breaks based on things that make a driver statistically safer to insure—like a good driving record or a vehicle with extra safety or anti-theft features. Drivers of all ages may qualify for a discount after taking a defensive driving course. And carpoolers and those who work from home may benefit from low-mileage discounts.

You also might be able to get discounts for behaviors that cut costs for the insurer—by going paperless, for example, using automated payments, or paying premiums annually instead of two or more times a year.

All discounts are not created equal: Some provide a larger price cut than others, so it can help to look at the bottom line. The amount you can save also may vary by company and location, and the options can change from year to year.

Which is another reason it can be a good idea to check car insurance rates regularly.

Explore Bundling

Another way to get a price break can be to “bundle” your insurance coverage with one insurer. That might mean purchasing your homeowners (or renters) insurance and car insurance from one company, or using one company for both your car and boat insurance.

You also might get a reduction if you are insuring more than one vehicle.

Bundling can result in a substantial discount. Still, you may wish to get separate policy quotes as well, just to be sure you’re really saving money and getting exactly what you want.

Consider a Higher Deductible

Choosing a higher deductible can significantly reduce your premium. (Your deductible is the amount you’ll pay out of pocket before your insurance company pays the rest of a claim.)

According to the Insurance Information Institute, increasing your deductible from $200 to $500 could cut the cost of collision and comprehensive coverage by 15% to 30%. And going even higher, to $1,000, could save you 40% or more, the insurance industry association says.

Of course, there’s a catch: If you have an accident, you may end up having to fork over a larger chunk of money than you’re comfortable with before the insurance company kicks in its share on a claim.

Before you go for the savings, you may want to be sure you can afford an unexpected repair bill.

Review Coverage Needs

If you have a car that’s getting older, it might be time to reevaluate the coverage you’re carrying on it.

You may decide to drop your comprehensive coverage (the portion that helps pay to replace or repair your vehicle if it’s stolen or damaged in an incident that’s not a collision) or collision coverage, for example, or lower the amount of those coverages.

Keep in mind, though, that if you do give up this coverage, you may have to pay to repair or replace your vehicle if it’s damaged. So it’s important to balance today’s savings with tomorrow’s what-ifs.

As you make your decisions, you’ll have to keep any coverage that’s required by the laws in your state and by your lender (if you’re still paying for the car) or a lease agreement.

Before Buying a Car, Consider Insurance Costs

Some cars cost more to insure than others, so before you save up for a car, you may want to check out how buying a car (used or new) might affect your premiums.

Insurance companies base their prices, in part, on a car’s sticker price, its safety record, what it might cost to repair it, its engine size, and the chance that the car will be stolen.

You may have heard that color is also a factor—and that a red car can cost more to insure—but according to the Insurance Information Institute, that is a myth. You can, however, expect a powerful sports car to kick up your costs.

Improve Your Driving Record, If Needed

This one’s pretty basic: A person with a bad driving history—with multiple accidents, insurance claims, and/or traffic violations—can expect to pay more for car insurance than someone with a good record.

If you aren’t sure where you stand, or you think there might be an error on your record, you can get a copy of your motor vehicle report through your state’s department of motor vehicles or the agency that handles driver’s licenses.

Improve Your Credit, If Necessary

You probably already knew that maintaining a good credit record can save you money in many ways—and you can include lower car insurance premiums on that list.

Just how much a solid credit score can save you may depend on the insurance company and the state you live in. But you can expect your credit data to play some part in your provider’s underwriting decisions.

The good news is, there are steps you can take to build credit fast, including disputing any errors on your credit reports and paying your bills on time.

Recommended: Pros & Cons of Car Refinancing

Ask About Group Insurance

Some companies and other organizations offer group plans with lower rates for their employees or members. Your human resources department can fill you in on what’s available through your employer.

If you’re a member of a large organization, you may receive insurance offers in the mail or by email, or you can inquire with the main office.

The Takeaway

Wondering how to lower your car insurance? A good starting point on the road to cheaper car insurance can be to compare your current policy to offers from other insurance companies.

Try an apples-to-apples comparison of your existing policy to others to find the best deal, and if you like your quote, buy the policy right then and there.

Get started with SoFi Protect today.

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SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

¹SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc’s service. Vehicle Identification Number is confirmed by LexisNexis and car values are provided by J.D. Power. Auto Tracker is provided on an “as-is, as-available” basis with all faults and defects, with no warranty, express or implied. The values shown on this page are a rough estimate based on your car’s year, make, and model, but don’t take into account things such as your mileage, accident history, or car condition.

Insurance not available in all states.
Gabi is a registered service mark of Gabi Personal Insurance Agency, Inc.
SoFi is compensated by Gabi for each customer who completes an application through the SoFi-Gabi partnership.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Yes, they are usually similar rectangles of plastic, but charge cards and credit cards are actually very different financial products.

Charge cards, unlike credit cards, do not charge interest. Nor do they allow you to carry a balance over from one month to the following one.

In addition, charge cards often feature uncapped spending limits and considerable reward benefits to cardholders. However, it’s not all positive: They typically come with relatively high annual fees.

There are likely pros and cons of using a charge card vs. a credit or debit card. If you learn how each of these payment systems work, it can put you in a better position to decide which card you may want to use at various times and in different situations.

What is a Charge Card?

A charge card is a branded payment card that can be used anywhere the brand is accepted for electronic payment.

Charge cards require a credit application for approval, and typically are only approved for borrowers with good to excellent credit.

Like a credit card, charge cards allow the cardholder to make purchases that can be paid for at a later date.

However, unlike a credit card, which allows the cardholder to carry a revolving balance by making minimum payments each month, charge card balances must be paid in full at the end of each statement cycle.

If you don’t pay the balance at that time, you may not only face hefty late fees (often considerably higher than those you’d see with a credit card).

However, this strict repayment requirement does come with some benefits.

For one thing, most charge cards don’t have a preset spending limit like credit cards do.

That doesn’t mean you can spend an unlimited amount, however. It means that the max amount you can spend changes, depending on your card usage, credit history, financial resources, and other factors.

These limitations can change frequently. You can find out what your spending limit is on the spot online, with a mobile app, or by calling the number on the back of the card.

Charge cards are also known for their generous rewards, including purchase points and/or credits for making a purchase, and sometimes offer double or triple points on dining and travel expenses.

The benefits of a charge card aren’t free, however. Although charge cards don’t charge interest on purchases, since they’re paid off in full at the end of each billing cycle, almost all charge cards do require an annual fee. These fees can range from $95 to $5,000 for a super-premium American Express Black Card.

Recommended: Tips for Using a Credit Card Responsibly

Charge Card vs. Credit Card

Although charge cards and credit cards are similar, the differences between them can make one payment system more appealing than another, depending on your financial situation and spending habits.

Credit cards, like charge cards, allow purchases to be made today and paid for tomorrow — but in this case, “tomorrow” doesn’t necessarily have to mean the end of the billing cycle.

Credit cardholders are able to carry a balance from month to month, sometimes called a revolving balance, which allows the flexibility to pay when you’re able.

However, it’s important to note that credit card companies charge interest on these revolving balances — and the compound nature of that interest means that interest can also be assessed on the interest itself over time.

That’s one reason it’s so easy for credit card debt to spiral–and one reason being forced to pay the bill in full each month, as charge cardholders are, can be an attractive option for those working on their financial self-discipline.

That said, those who have the discipline to pay their credit card bill in full each month can avoid paying interest entirely, since credit card companies only charge interest on revolving balances.

If your credit card doesn’t assess an annual membership or maintenance fee, that means you can use the card to your heart’s delight and never pay a dime more than you spent on your purchases, provided you’re diligent about paying the statement off in full each and every time.

Both credit cards and charge cards often offer additional bonuses and benefits, such as cash-back rewards, points you can use towards purchases, concierge services, and statement credits.

The value of these kinds of rewards often scales with the annual membership fee in both credit and charge cards, so you’ll want to always be sure to read the fine print before signing any paperwork.

Recommended: Secured vs. Unsecured Credit Cards

Charge Card vs. Debit Card

Since a charge card isn’t an extension of long-term credit in the same way a credit card is, it might be tempting to compare it to a debit card. But there are significant differences between these two types of electronic payment systems too.

A debit card, unlike either a charge card or a credit card, is linked to a spending account with real money in it.

Therefore, in most cases, the cardholder can’t spend more than the amount they’ve put into that account. If they do, they may face pricey overdraft fees and have the difference taken out of the next deposit they make.

Debit cards, however, generally don’t involve interest charges or annual fees. They’re simply a shortcut for taking money out of a spending account.

Debit cards are also used to withdraw money from the ATM and can be used at certain point-of-sale terminals to get cash back when the cardholder needs actual dollars in hand.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Pros and Cons of Charge Cards

Charge cards, like any other financial product, have both benefits and drawbacks.

While some consumers may enjoy having and using a charge card, others may feel the annual fee is not worth the benefits.

Pros of Charge Cards

•   Because they have to be paid in full each month, charge cards can help avoid a credit card debt spiral.

•   Charge cards have no preset spending cap, which may allow cardholders to make large purchases without having to worry about “maxing out” the card.

•   Charge cards don’t require paying interest (though high fees can be assessed for late payments).

•   Charge cards often offer generous rewards and benefits, such as purchase points, statement credits, and sometimes double or triple points on dining and travel (which can make them a good option for business travelers).

Cons of Charge Cards

•   Many charge cards carry high annual fees, while many fee-free credit and debit cards are available.

•   Charge cards are offered by a limited number of issuers, so there are typically far fewer to choose from than credit cards.

•   As with credit cards, late payments can ding your credit history. With charge cards, however, consistently late payments can be more detrimental to your credit than late credit card payments.

•   You have to pay the whole balance to avoid a late fee (with a credit card, you can typically pay the minimum payment to avoid the late fee).

Alternatives to Using Charge or Credit Cards

The buy-now-pay-later model of purchasing has its advantages, since you can have something in hand before you actually have the funds to cover the cost.

But if you’d rather avoid hefty annual fees and/or paying interest, another way to afford a significant purchase is to start saving ahead of time. You may also want to consider setting up a separate savings account earmarked for that particular savings goal.

For something major you’d like to buy within a couple of years, consider opening an account that offers higher interest than a traditional bank account, but will allow you to access your money when you need it. Good options include a savings account from an online vs. traditional bank, money market account, or a checking and savings account.

To make sure you stay on track with your savings goal, you may also want to set up automatic payments between your spending account and your savings account. For example, you could select a dollar amount (and it’s fine to start small) to be sent each month after your paycheck gets deposited.

The Takeaway

A charge card is a financial product that, like a credit card, allows the cardholder to make purchases now that they then pay for later.

However, unlike credit cards, charge cards don’t allow cardholders to carry a revolving monthly balance — all charges must be paid in full at the end of the billing cycle.

Charge cards also don’t carry preset spending caps (though there may still be some spending limits), and typically assess annual membership fees. But if you enjoy perks, travel frequently, and make the occasional high-ticket purchase, a charge card might be a good fit for you.

If you’d rather avoid annual fees and/or paying interest, you may want to simply save up for that next big purchase.

One way to make saving for a short-term goal a little easier is to sign up for a SoFi Checking and Savings Account. SoFi Checking and Savings allows you to spend and save, all in one account. And you’ll pay zero account fees to do it.

Using SoFi Checking and Savings’s Vaults feature, you can separate your spending from your savings while still earning a competitive interest rate on all your money.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Actively managed funds and index funds are similar in that they’re both a type of pooled investment fund, and they both come in a variety of styles (e.g. large cap, small cap, green bonds, and so on). The main difference between them is that actively managed funds rely on a team of live portfolio managers vs. index funds, which simply track or mirror a relevant index using an algorithm.

The difference in management style between active and so-called “passive” index funds leads to a series of other differences, including cost and transparency around securities in the fund.

The debate concerning the merits of actively managed funds vs. index funds is a longstanding one. Both types of funds have the potential to yield advantages to investors. But they each have drawbacks that should be weighed in the balance.

What Are Index Funds?

Index funds are a type of mutual fund or exchange-traded fund (ETF) that mirror the performance of a specific stock market index.

A stock market index measures a particular sector of the market. In the case of the S&P 500 Index, for example, what’s being measured is the performance of the 500 largest U.S. companies.

While it’s not possible to invest in an index directly, index funds and ETFs offer a work-around because when you invest in an index fund, you’re purchasing a fund that holds securities which are representative of its representative index.

If you’re buying a fund that tracks the Nasdaq-100 Composite Index, for example, the fund would include stocks from the 100 largest and most actively-traded non-financial domestic and international securities listed on the Nasdaq. The securities are not hand-picked by a portfolio manager, and an index fund doesn’t seek to outperform the benchmark — but rather to match it.

Index funds can be cap-weighted, meaning they track an index that relies on market capitalization to decide which securities to include. Market capitalization is a company’s value as determined by its share price multiplied by the number of shares outstanding.

For example, some index funds only track large-cap companies that have a market capitalization of more than $10 billion. Others focus on small-cap companies that have a market capitalization of $250 million to $2 billion.

Index funds and index investing follow a passive investment strategy. That means that the fund tracks the performance of a particular benchmark, rather than trying to beat the market by using the skills of a live portfolio manager.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What Are Actively Managed Funds?

Actively managed ETFs and mutual funds also represent a collection or basket of securities. The difference between these types of funds and index funds is that instead of being passively managed and tracking a specific index, a fund manager plays a hands-on role in determining which securities to include, in an attempt to beat the market.

Because of that, fund turnover — the movement of assets in and out of the fund — may be more frequent compared to an index fund. This has certain tax and cost implications for investors.

Index Funds vs Actively Managed Funds

Index funds do have some similarities to actively managed funds, but the chief difference between them — i.e. the use of passive management vs. active management — yields some important other differences.

	Index Funds	Active Funds
Types of securities	All securities (stocks, bonds, etc.)	All securities (stocks, bonds, etc.)
Investment objective	To mirror its benchmark	To outperform its benchmark
Management style	Passive (securities in the fund match the index)	Active (fund managers select securities in the fund on the basis of performance)
Cost	Average expense ratio is about 0.03 to 0.05%	Average expense ratio is about 0.50% to 0.75%
Tax efficiency	Less turnover, more tax efficient	Higher turnover, less tax efficient

Similarities

As noted above, both types of funds are pooled investment funds. You might have passively or actively managed mutual funds as well as exchange-traded funds.

Both types of funds can be invested in a wide range of different equities, bonds, and other securities. For example, you might have a small-cap ETF that’s passively managed (perhaps it tracks the Russell 2000 small-cap index) or an ETF that’s actively managed and also invested in small-cap companies.

Differences

The chief differences between actively managed funds show up in terms of cost and tax implications, and performance.

Actively managed funds are generally more expensive than index funds, because the fund employs a team of active managers who hand-pick securities and trade them.

Active funds also have a different investment objective: to beat the market. Index funds merely seek to mirror the performance of its benchmark index.

So a large-cap actively managed fund might seek to outperform the S&P 500, whereas a large-cap index fund that tracks the S&P 500 would aim to deliver the same results as the index itself.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Pros and Cons of Index Funds

There’s a lot to like about index funds but with any investment, it’s important to consider the potential downsides. Reading through an index fund’s prospectus can offer more insight into how the particular fund works, in terms of what it invests in, its risk profile, and the costs you’ll pay to own it. This can help you better gauge whether a particular index fund aligns with your investment strategy.

When weighing index funds as a whole, here are some important points to keep in mind.

Index Fund Pros

•   Simplified diversification. Diversification may help manage risk inside a portfolio. Index funds can make diversifying easier through exposure to multiple securities that represent a specific index.

•   Cost. Because they are passively managed, index funds typically charge fewer fees and carry expense ratios that are well below the industry average of 0.57%. Fewer fees allow you to keep more of your investment returns.

•   Tax efficient. Index funds tend to turn over assets less frequently than actively managed funds, which means fewer capital gains tax events — another way index funds can save investors money.

•   Consistent returns. The idea behind an index fund is that it will closely track its benchmark to mirror performance. Index funds can offer stable returns over time when they perform in tandem with their respective indices.

Index Fund Cons

•   Underperformance. Index fund returns can differ from one fund to the next and factors such as fees, expense ratios, and market conditions can affect how well a fund performs. It’s possible that rather than matching its benchmark, an index fund may deliver returns below expectations.

•   Cost. Between index funds vs. managed funds, index funds tend to have lower costs — but that’s not always the case. It’s possible to invest in index funds that prove more expensive than actively managed funds.

•   Tracking error. Tracking error occurs when an index fund’s performance doesn’t match the performance of its benchmark. This can happen if the fund’s makeup doesn’t accurately reflect the makeup of securities tracked by the index.

•   Limit on returns. Index funds aren’t designed to beat the market. Investing in these funds, without considering active investing strategies, could limit your return potential over time and cause you to miss out on bigger investment gains.

Why Invest in Index Funds?

Index funds and index investing may work better for a buy-and-hold investor who’s focused on investing for the long-term. Buy-and hold-strategies often go hand in hand with value investing strategies, in which the emphasis lies on finding companies that are undervalued by the market.

Utilizing index funds could simplify investing over the long term, and it may suit people who want to minimize risk-taking in their portfolios. But it’s important to consider the trade-offs involved with choosing index funds vs. actively managed funds.

Pros and Cons of Actively Managed Funds

With active funds, fund managers use their knowledge and expertise to determine which securities to buy or sell inside the fund in order to reach the fund’s investment goals.

As with index investing, using actively managed funds to invest can have its high and low points. Here are some key things to know about investing with actively managed funds.

Actively Managed Funds Pros

•   Professional expertise. Actively managed funds allow investors to benefit from a fund manager’s know-how and experience in the market. This may be reassuring to an investor who’s still learning the ropes of how trading works, or who has faith in a particular fund manager.

•   Higher returns. Actively managed funds seek to outperform the market. If the fund realizes its objectives, returns could possibly exceed those offered by index funds. Historically, though, the majority of active funds don’t outperform the market.

Actively Managed Funds Cons

•   Underperformance. As with index funds, it’s possible that an actively managed fund’s returns won’t meet investor expectations. This can happen if the fund manager makes a miscalculation when choosing securities or unforeseen events, such as a major economic downturn, deliver a blow to the market.

•   High management fees. The costs associated with having a fund manager make decisions are typically higher than with passively managed index funds.

•   Risk. Active trading can be riskier than index investing, since performance relies on the fund manager to make buying and sellings decisions.

•   Taxes. Since asset turnover is higher for actively managed funds, more capital gains tax events are likely. Even though an actively managed fund may generate higher returns, those have to be weighed against the possibility of increased tax liability.

Why Invest in Actively Managed Funds

Actively managed funds may offer more downside than upside to investors. Unlike index funds, actively managed funds may not be suited for a long-term, buy-and-hold strategy. But for investors who have the time or inclination to take their chances for a greater potential yield, they might be an attractive part of a portfolio.

Are Index Funds Better than Managed Funds?

Both actively managed funds and index funds aim to help investors achieve their goals, but in different ways and with potentially different results. Whether index funds or managed funds are better hinges largely on the individual investor and what they need or expect their investments to do for them.

When considering index funds and actively managed funds, ask yourself what’s more important: Steady returns or a chance to beat the market? While actively managed funds can outperform market indices, results aren’t guaranteed and in some cases, active funds can lag behind their benchmarks.

Index funds, on the other hand, may offer a greater sense of stability over time and potentially more insulation against market volatility. While all investments carry the risk of loss, over time there may be a smaller chance of losing money in an index fund. But there are no guarantees.

Lower investment costs can also be attractive when estimating net returns, but again it’s important to compare fund costs against fund performance individually, to ensure that you’re comfortable with the number.

The Takeaway

Whether you prefer index funds vs. managed funds might depend on your age, time horizon for investing, risk tolerance, and goals. If you lean toward a hands-off, goals-based investing approach that carries lower costs, index investing could suit you well.

On the other hand, if you’re more interested in beating the market, and if you believe active management is more likely to deliver outperformance, then you may consider the benefits of active investing.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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