8.12What is an index fund?
1What is it?
An index fund simply copies an index, like the Nifty 50, holding the same stocks in the same weights.
2Why does it exist?
No stock-picking means very low costs. Over long periods, many active funds fail to beat their index after fees.
3Stock market example
A Nifty 50 index fund holds Reliance, HDFC Bank, ICICI Bank, Infosys and the other 46 in Nifty weights. Its returns ≈ Nifty returns minus a small expense and tracking error.
4Quick revision
- Copies an index.
- Low cost.
- Return ≈ index − costs.
5Knowledge check
Q1. Does an index fund manager pick stocks?Show answer
No, they follow the index.
Q2. What is tracking error?Show answer
The difference between the fund’s return and the index return.
Q3. Why are index funds cheap?Show answer
No research team is needed for stock selection.
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