Index fund
Also called: ETF, exchange traded fund
A mutual fund that holds every share in an index in the same proportions, so it follows the index instead of trying to beat it.
An index fund does not pick shares. It holds what the index holds, in the same weights, and changes only when the index does. That keeps it cheap: the yearly fee, called the expense ratio, is often a small fraction of what actively managed funds charge.
An exchange traded fund (ETF) does the same job but trades on the stock exchange like a share, so you need a demat account to buy one. An index fund is bought from the fund house at the day’s price, the NAV, often through a monthly SIP.
Example
You put 10,000 rupees in a Nifty 50 index fund with an expense ratio of 0.2 percent. The fee is about 20 rupees a year. If the Nifty rises 12 percent, your fund rises a little less than that, because of the fee and small tracking differences.
Watch out
Compare tracking error as well as the fee. Two funds copying the same index can drift a fraction of a percent apart every year, and that adds up.
Learn it properly in
Chapter 1.2: Sensex and Nifty: what the two numbers on the news actually measure