What is an index fund?

An index fund is defined as a mutual fund that aims to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. The primary goal of an index fund is to match the holdings and weightings of the securities within that index rather than trying to outperform it through active management. This approach typically results in lower fees and expenses compared to actively managed funds since there is less trading and research involved.

By investing in an index fund, investors gain exposure to a diversified portfolio of assets, which can help reduce risk. Because the fund's performance closely mirrors the index it tracks, investors can benefit from the overall market's growth over time. This passive investment strategy has gained popularity among individual investors due to its simplicity, cost-effectiveness, and historically competitive performance relative to actively managed funds.