What is an index fund?
An index fund is a type of mutual fund that invests in line with a particular index—like the S&P 500 or the Russell 2000. The major attraction is that index funds are often managed by a computer. This reduces the high operating expenses that actively managed funds charge. Operating costs cut into investment returns and index funds offer a convenient alternative that curbs these fees. Index funds also tend to make fewer trades than active funds, further reducing expenses. Research suggests that index funds have outperform regular mutual funds in the long-run, so more financial advisors advocate for including at least one index fund in a portfolio. Another advantage is that index funds do not make the same mistakes as actively managed funds often make. An index fund follows the index without reacting to the market too aggressively or too passively, as active managers often do. Disadvantages are that index funds are not immune to a bubble in the market and could therefore suffer with the market; similarly, when the market is declining index funds will follow that, whereas actively managed funds try to predict and compensate against the market declines.
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