Question

What is an index fund?

Short answer

Index fund is an investment strategy that employs a rules-based fund.

Step-by-step solution

Concept introduction

A mutual fund is a collection of money from a number of different investors.

Explanation of solution

An index fund is a type of mutual fund that is designed to follow established guidelines in order to monitor a specific set of trends. Investors do not need to be concerned and can focus on analysing the stocks. Their investment will be in line with the current trend. S&P 500 is the most popular index fund in the United States, and it is based on S&P Dow Jones Indices' criteria. They are a collection of firms whose stocks are classified in groups based on their size, qualities, and profitability. Overall, it has a more diverse portfolio with lower fees and operational costs because companies who do not follow the rules are removed from the fund, and there is no need for active management to inspect and track.