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The Lowdown On Index Funds
Index funds have provided investors with a return that is directly linked to individual markets while charging minimal amounts for expenses. Despite their benefits, not everyone seems to know exactly what index funds are and how they compare to the many other funds offered by different companies.
Active and Passive Management
Before we get into the details of index funds, its important to understand the two different styles of mutual-fund management: passive and active.
Most mutual funds fit under the active management category. Active management involves the art of stock picking and market timing. This means the fund manager will put his/her skills to the test trying to pick securities that will perform better than the market. Because actively managed funds require more hands-on research and because they experience a higher volume of trading, their expenses are higher.
Passively managed funds, on the other hand, do not attempt to beat the market. A passive strategy instead seeks to match the risk and return of the stock market or a segment of it. You can think of passive management as the buy-and-hold approach to money management.
What Is an Index Fund?
An index fund is passive management in action: it is a mutual fund that attempts to mimic the performance of a particular index. For instance, a fund that tracks the S
