Mutual Funds: Index Funds

Over the long haul, it's pretty tough to beat the market, which historically has churned out average annual returns of about 10%. In the "If you can't beat 'em, join 'em" spirit, index funds were created.

Index mutual funds aim to match the performance of a securities index by purchasing shares of all or nearly all of the stocks in that particular index. The granddaddy of all index funds (and still the biggest index fund), the Vanguard 500 Index, was created in 1976 for investors to track the performance of the S&P 500, a broad index that lists 500 large companies from a cross-section of sectors. Since then, index funds have cropped up that mirror just about every index out there: small-cap indices, sector indices, you name it. Indeed, there are even "enhanced" index funds that try to slightly exceed the performance of a given benchmark, but that isn't always easy to do. (Another growing segment of index funds are exchange-traded funds .)

Because the aim of most index funds is merely to mirror an index's performance, the funds aren't actively managed. This means the management fees are typically far less expensive than most mutual funds. Their relatively low cost is a key factor in their popularity. ...