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An index fund is a type of
mutual fund that invests in the companies that comprise a specific "index" (a
statistical composite that measures the financial markets, such as the Standard &
Poor's 500 or the Russell 2000, for example). The objective of this type of fund is to
mirror the performance of the selected index.
An index fund buys a portfolio of stocks that are expected to behave exactly, or almost
exactly, as the index does. This is called passive management, since the account doesn't
change and the portfolio manager doesn't make daily investment decisions. As you might
expect, passively managed funds tend to have lower management fees than actively managed
funds.
For more on this topic, read the article "Deconstructing Index Funds".
You should remember that, as a rule, it is never a good idea to invest in any fund until
you read its prospectus and understand the risks involved. |
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