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What is an Index Fund?
An index fund is an investment fund designed to track the performance of a specific market index, such as the S&P 500 or FTSE 100. It follows a passive investment strategy by holding the same (or a representative sample of) securities in the index.
Definition
An index fund is a passively managed investment fund that aims to replicate the returns of a particular market index.
Key Takeaways
- Follows a passive investment strategy.
- Typically has lower fees than actively managed funds.
- Provides broad market exposure and diversification.
Understanding Index Funds
Index funds invest in the same securities, and in the same proportions, as their target index. Because they do not rely on frequent trading or active stock selection, operating costs are generally lower.
These funds are popular among long-term investors due to their simplicity, transparency, and historically competitive returns. Index funds can track equity indices, bond indices, or sector-specific indices.
Index funds are available as mutual funds or exchange-traded funds (ETFs).
Real-World Example
An S&P 500 index fund invests in the 500 largest publicly traded U.S. companies, allowing investors to gain exposure to the overall U.S. stock market with a single investment.
Importance in Business or Economics
Index funds are important because they:
- Democratize access to diversified investing
- Reduce investment costs
- Improve market efficiency
- Serve as benchmarks for active fund performance
Types or Variations
- Equity Index Funds — Track stock market indices
- Bond Index Funds — Track fixed-income indices
- Sector Index Funds — Focus on specific industries
- International Index Funds — Track foreign markets
Related Terms
- Exchange-Traded Fund (ETF)
- Passive Investing
- Market Index
Sources and Further Reading
Quick Reference
- Tracks a market index
- Low-cost, passive investment
- Broad diversification
Frequently Asked Questions (FAQs)
Are index funds safer than individual stocks?
They are generally less risky due to diversification, but still subject to market risk.
Do index funds outperform active funds?
Over the long term, many index funds outperform most active managers after fees.
Can index funds lose money?
Yes, returns depend on overall market performance.
