Definition
Index Fund
An index fund is a passively managed mutual fund that aims to replicate the performance of a market index by holding the same securities in the same proportions, at low cost.
An index fund tracks a benchmark — such as a broad equity index — by mirroring its constituents and weights, rather than a manager actively picking stocks. Its goal is to match, not beat, the index, minus a small expense.
Because it is passive, an index fund typically has a lower expense ratio than actively managed funds and avoids fund-manager risk. Over long periods, low costs and broad diversification are its main appeals.
Index funds are a building block for many modern, low-cost portfolios and underlie robo-advisory and direct-indexing approaches. Returns track the market, so they fall when the index falls.
Related terms
- Robo-AdvisoryRobo-advisory is automated, algorithm-driven investment advice and portfolio management delivered online, typically recommending and managing low-cost diversified portfolios based on your profile.
- Direct IndexingDirect indexing means owning the individual stocks that make up an index in your own account, rather than buying an index fund or ETF, allowing customisation and tax management.
- Gold ETFA Gold ETF is an exchange-traded fund that tracks the price of physical gold, letting investors buy and sell gold exposure on the stock exchange in demat form.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.