What It Means
An index fund is a mutual fund designed to mirror the performance of a specific market index, like Nifty 50 or Sensex, by holding the same stocks in roughly the same proportion as the index itself.
How It Works
Unlike an actively managed fund, where a fund manager picks stocks and times entries/exits trying to beat the market, an index fund simply replicates it — no stock-picking, minimal trading, and correspondingly lower fees (expense ratio). Its return closely tracks the index's return, minus that expense ratio and a small amount of "tracking error" from the mechanics of replication. This passive approach has become popular precisely because most actively managed funds struggle to beat their benchmark index consistently over long periods, after fees.
Related Terms
- ETF (Exchange-Traded Fund) — a similar passive vehicle, but one that trades intraday like a stock instead of being priced once a day