Index funds is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). It is said to provide broad market exposure, low expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets. "Indexing" is a passive form of fund management that has been successful in outperforming most actively managed mutual funds. While the most popular of these funds track the S&P 500, a number of other indexes, including the Russell 2000 (small companies), the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Barclays Capital Aggregate Bond Index (total bond market) are widely used.
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It is possible to want to invest in something, for instance a stock, but not have all the professional know how, or even enough funds needed to manage the investment. In such cases, various investors will pool funds together and have a money manager professionally manage their investments. This is called a Mutual Fund. One type of this is what is referred to as index funds. With these, the investment portfolio is designed to match the market index. One of its advantages over other mutual fund types is the low fees associated with it.
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