What Is an Index Fund?

A mutual fund or exchange-traded fund (ETF) that tracks or matches the components of a financial market index, such as the Standard & Poor’s 500 Index, is known as an index fund (S&P 500). A broad market exposure, minimal operating expenses, and low portfolio turnover are all claimed benefits of an index mutual fund. Regardless of the status of the market, these funds track their benchmark index.
Index funds are commonly regarded as suitable core portfolio holdings for retirement accounts such as IRAs and 401(k)s. Warren Buffett, the legendary investor, has suggested index funds as a safe refuge for retirement money. He has stated that rather than choosing particular businesses to invest in, it is more cost-effective for the typical investor to acquire all of the S&P 500 firms through an index fund.

Index funds is a category of mutual funds where the stocks in the fund are exactly same as the index from which they are derived. Index funds are passive funds which means that the portfolio of these funds is not changed very frequently until and unless there is some change in the index stocks.

Index funds are not actively managed funds, thus incurs low expenses. They do not aim at outperforming the market, but instead to maintain uniformity. They help an investor manage or balance his risks in his investment portfolio.

Index funds are ideal for investors who are risk-averse and expect predictable returns. These funds do not require extensive tracking. For example, if you wish to participate in equities but don’t wish to take risks associated with actively-managed equity funds, you can choose a Sensex or Nifty index fund.