What is an index fund?

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An index fund is a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific financial market index, such as the S&P 500 or the FTSE 100. Instead of actively managed by portfolio managers who select individual stocks or other securities, index funds passively track the composition and weighting of securities in a chosen index.

The primary goal of an index fund is to match the returns of its target index as closely as possible. This is achieved by holding a diversified portfolio of securities that mirrors the index it tracks. Because index funds require less active management compared to actively managed funds, they typically have lower expense ratios and management fees, making them a cost-effective investment option for many investors.

Investors often choose index funds for their simplicity, broad diversification, and relatively low costs compared to actively managed funds. Additionally, index funds offer exposure to specific segments of the market without the risk of individual stock selection.

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In addition, Index funds are straightforward investment vehicles that are easy to understand, even for novice investors. They are available in both mutual fund and exchange-traded fund (ETF) formats, providing flexibility in how investors can buy and sell shares. This accessibility makes it easier for investors to build a diversified portfolio aligned with their investment goals.