What is an index fund?

An index fund is a mutual fund designed to replicate the performance of a specific index. This means that the fund aims to invest in the same securities that make up the index, in the same proportions, to closely match the index's performance. For instance, if the index is composed of the largest 500 companies in the United States, the index fund will hold stocks from those same companies reflecting their respective weight in the index.

This passive investment strategy typically results in lower management fees compared to actively managed funds, as the fund manager does not need to make frequent trades or research individual stocks. This approach also simplifies the investment process for investors, as they can invest in a diversified portfolio that mirrors the overall market or a specific sector without needing to analyze individual stocks closely. Index funds are favored by many long-term investors for their cost-effectiveness and ability to deliver market-average returns.