Meaning & Definition
An index fund is a type of mutual fund or investment fund that aims to copy the performance of a specific market index. Instead of choosing individual stocks, the fund invests in the same companies and in the same proportion as the index it follows. This makes index funds simple, low-cost, and suitable for long-term investors.
How an Index Fund Works
- Tracks a market index
- Invests in all index companies
- No active stock selection
- Returns move with the index
Why Investors Choose Index Funds
Index funds offer diversification, lower risk compared to individual stocks, and lower expense ratios.
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