Understanding the differences between mutual funds and index funds is fundamental for any investor navigating the diverse landscape of investment options. While both vehicles play critical roles in portfolios, they operate quite differently. Read on to learn more.
The Basics Of These Investment Funds
What Is An Index Fund?
An index fund is a type of mutual fund or exchange-traded fund (ETF) designed to mirror the performance of a specific financial market index, such as the S&P 500 or the Dow Jones Industrial Average. It operates by holding a diversified portfolio of securities weighted to represent the index it tracks, aiming to replicate its returns. These funds offer broad market exposure at a relatively low cost as they passively follow the index rather than actively trading securities. Index funds are favored for their simplicity, lower expense ratios compared to actively managed funds, and their ability to provide diversification across multiple companies within an index, making them a popular choice for long-term, low-risk investment strategies.
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