The objective of passively-managed index funds is to match performance of financial indices (such as S&P 500) by investing in exactly the assets the specific index is composed of.  Index Funds are related to mutual funds but their advantage is in their management fees, which are much lower than those of actively-managed funds. In fact, many index funds outperform actively managed funds.

One example is Vanguard 500 Index Fund Investor Shares trading under VFINX. This fund invests in 500 largest companies in the United States that account for 75% of the American stock market value. It is also among the lowest expense index funds.

Obviously, funds like these can’t do better then the index, and will do slightly poorer to pay for still existing (but reduced) management fees, and this is a major disadvantage of index funds. The benefit is that the index funds will not do much poorer than their underlying index as many of the actively managed counterparts do.

Index funds also offer an easy ways to diversify. Only few of these will give a wide exposure and at a low cost. Thus, an investor can buy a country fund, an international fund, and a fixed income fund for a very wide diversification.

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