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What are index funds?

Index funds are a type of mutual fund that attempt to closely track a specific grouping of the market. There are many types of index funds, but they are commonly known for their low costs, inherent diversification, and better-than-average returns over the long term. Index funds are the driving force behind the philosophy of passive investing, which attempts to build wealth slowly over time with little oversight. Index funds are one of the best tools the average investor has for building and growing a portfolio.

Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Warren Buffett, Chairman, Berkshire Hathaway

Index Funds as an Investment Type

Mutual funds are a collection of investments that are sold as a group rather than individually. Index funds are a specialized mutual fund that focus on a specific market index. The stock and bond markets can be broken up in countless ways, but the most common ways have a particular index that tracks how the same group of stocks or bonds performs over time. For example, the S&P 500 is a commonly known index that tracks the largest companies on the stock exchange. The goal of an index fund is to try to purchase a representative group of stocks or bonds that will perform as closely to an index as possible. Index funds are different from individual stocks or bonds because they are comprised of many stocks or bonds and typically have a theme or sector that tie them together. Index funds can be bought and sold on the markets like individual stocks in the form of Exchange Traded Funds (ETFs) or can be purchased from groups such as Vanguard or Fidelity.

History of Index Funds

Index funds are largely attributed to the research done by John Bogle, who later formed the Vanguard Group.

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