Index Fund
A mutual fund that seeks to replicate an index's holdings and return rather than to beat it.
How it is identified
Test: the fund holds constituents in index proportions and measures itself by tracking difference rather than by outperformance
Unit
qualitative
In depth
An index fund's entire proposition is low cost: it makes no attempt to select securities, so its return is the index's minus expenses and tracking error. The argument for it rests on arithmetic rather than opinion — before costs, all investors together earn the market return, so after costs the average actively managed rupee must underperform the index by the difference in fees. The distinction from an ETF is the mechanism: an index fund is bought and sold at the day's NAV directly from the fund house, while an ETF trades on an exchange at a price that can differ from its NAV. Index funds also accept SIPs, which ETFs generally do not.
Worked example
An index fund charging 0.20% against an index returning 12.0% should return about 11.8% before tracking error. An active fund charging 1.8% must generate 1.6 percentage points of gross outperformance merely to match it.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Index Fund” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.