An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
A central advantage to index funds is that they are relatively low-risk options for investing in stocks and bonds, designed for steady, long-term growth.
They are inherently diversified, representing many different sectors within an index, which protects against deep losses.
Since an index fund mimics its underlying benchmark, there is no need for an efficient team of research analysts to help fund managers pick the right stocks.
Also, there is no active trading of stocks. All these factors lead to the low managing cost of an index fund.
Since index funds are passively managed, they usually enjoy low turnover, i.e. few trades placed by a fund manager in a given year.
Fewer trades results in fewer capital gains distributions that are passed to the unitholders.
In this video, Jack Bogle, who created the first index fund in the world, discussed the advantages of the U.S. index funds. He also gave advice about how to have an international investment portfolio.
Source: Finance Jane.
