index fund

index fund definition - business

index fund

A mutual fund that keeps a portfolio of securities designed to match the performance of the market as a whole. The market is represented by a market index such as the S&P 500. An index fund has low administrative expenses and appeals to investors who believe it is difficult or impossible for investment managers to beat the market.

With so many different index funds available, how are individuals to decide which ones best fit their needs?

For those investors who believe that investment managers offer no value, an index fund is a good option for participating in the equity markets. The best index funds have a low expense ratio and a low tracking error (the difference between the return of a portfolio and the return of a benchmark index). Investors should also properly diversify according to their asset allocation plan.

Richard S. Campbell, CIMA®, Senior Vice President, Wealth Management, Portfolio Management Director, Smith Barney, Valdosta, GA

The American Heritage® Dictionary of Business Terms Copyright © 2009 by Houghton Mifflin Harcourt Publishing Company. Published by Houghton Mifflin Harcourt Publishing Company. All rights reserved.

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