An index fund is a "passively" managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500 or the Dow Jones Industrial Average. Since index funds attempt to mirror a stock index, decisions about which stocks to buy and sell are automatic for the fund and transactions are infrequent. This means that index funds do not require the management of a professional money manager, and so they are said to be "passively managed" (while any fund that requires a manager to select stocks is said to be "actively managed").
Index funds have become increasingly popular with investors over the past few decades for a variety of reasons. First, the funds have much lower operating expenses than actively managed funds. This is because passive funds do not require the services of a professional money manager to select stocks for the fund's portfolio; instead, they simply buy and sell according to the holdings of a particular index. And, since most indexes do not often change their holdings, index funds benefit from lower transaction costs and fewer capital gains taxes in addition to the lower management costs.
Many investors also like index funds because they do not have to worry about "beating the market" since they can choose to invest in an index that mirrors the market (either the market as a whole or some specific part of it). But although you'll never significantly underperform the market with an index fund, you'll also never have the opportunity to significantly outperform it. Even so, as more and more studies have shown that most mutual fund managers are unable to beat the market consistently, more and more investors have been starting to take advantage of index funds. For individuals who don't have the time or interest to select and monitor a portfolio of actively managed mutual funds, InvestorGuide recommends seriously considering index funds.
Index funds have become increasingly popular with investors over the past few decades for a variety of reasons. First, the funds have much lower operating expenses than actively managed funds. This is because passive funds do not require the services of a professional money manager to select stocks for the fund's portfolio; instead, they simply buy and sell according to the holdings of a particular index. And, since most indexes do not often change their holdings, index funds benefit from lower transaction costs and fewer capital gains taxes in addition to the lower management costs.
Many investors also like index funds because they do not have to worry about "beating the market" since they can choose to invest in an index that mirrors the market (either the market as a whole or some specific part of it). But although you'll never significantly underperform the market with an index fund, you'll also never have the opportunity to significantly outperform it. Even so, as more and more studies have shown that most mutual fund managers are unable to beat the market consistently, more and more investors have been starting to take advantage of index funds. For individuals who don't have the time or interest to select and monitor a portfolio of actively managed mutual funds, InvestorGuide recommends seriously considering index funds.
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