Money word, in plain English ← Back to all terms
Index fund
A fund that simply copies a market index instead of trying to beat it.
Example. A Nifty 50 index fund holds the same 50 companies, in the same proportions.
An index fund buys the companies in an index in the same weights, so its return closely tracks that index. Nobody is picking stocks, so the expense ratio is usually far lower than an actively managed fund. You give up the chance of beating the market and in exchange you avoid the risk of badly trailing it, at a low cost. The gap between the fund and the index it copies is called tracking error.
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