Definitions

• A savings account is a depository account held with a financial institution that is guaranteed by the Federal Deposit Insurance Corporation up to $250,000. A customer with a savings account receives an interest payment monthly or quarterly based on the interest rate the account pays. Index funds are a type of mutual fund that invest in stocks, bonds or other assets in proportion to how much those assets are represented in an asset index, such as the S&P 500. The goal of an index fund is to have its performance mirror its underlying index with as little expenses as possible.
  
  

Volatility

• Savings accounts have lower returns compared to other assets, but their return is much more reliable. The amount of interest a bank pays on a savings account is determined by the federal funds rate, which is determined by the Federal Reserve. Historically, this rate has not changed drastically over short periods of time, and is usually set to counter inflation expectations. The volatility of an index fund depends on the volatility of its underlying index, which can vary quite a bit. For example, the Vanguard Mid-Capitalization U.S. stock fund is based off the S&P 500 completion index, whose value varied over 60 percent between 2003 and 2009.
  
  

Time

• The amount of time you hold each investment will affect whether one asset outperforms the other. Traditionally, stock and bond indexes outperform cash investments like savings accounts, but in years when the stock or bond market loses value, holding cash in a savings account will provide a better return. For example, stocks have historically had a real return of 8 percent, more than a savings account has earned. But in 2008 the Vanguard Mid-Cap stock index fund lost over 37 percent of its value, making a savings account a much better investment choice that year.
  
  

Fees

• Savings accounts and index funds have different fee structures. Both investments can require minimum deposits, and financial service companies can charge a fee for accounts that do not meet this minimum. An index fund charges an expense fee, which is a percentage of the investment used to pay for administration costs. An index fund can also charge a load, which is a fee paid when the fund is purchased and is a percentage of the investment amount. Depending on your time horizon and amount you have invested, the incidence of these fees can determine which investment outperforms the other.