Index Fund
Explanation: An index fund is a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific market index, such as the S&P 500 or the NASDAQ-100. Index funds aim to provide broad market exposure, low operating expenses, and low portfolio turnover. They are considered a passive investment strategy as they follow a set benchmark rather than trying to outperform the market.
Example: An investor buys shares of an S&P 500 index fund, which holds all 500 companies in the S&P 500 index. The performance of the fund mirrors the performance of the index, providing the investor with diversified exposure to the U.S. stock market.
Reference Link: For more information on index funds, visit Investopedia’s Index Fund.
FAQs:
- What are the benefits of investing in index funds?
- Benefits include diversification, low costs, simplicity, and performance that matches the market index.
- How do index funds differ from actively managed funds?
- Index funds passively track a benchmark index, while actively managed funds aim to outperform the market through stock selection and market timing.
- What are the risks associated with index funds?
- Risks include market risk, as index funds are subject to the performance of the underlying index, and lack of flexibility in response to market changes.
- Can index funds pay dividends?
- Yes, index funds can pay dividends based on the dividend payments from the stocks held within the fund.
- How do I choose the right index fund?
- Consider factors such as the index being tracked, expense ratio, fund performance, and the fund’s investment strategy.