Why you might consider investing in index mutual funds

A diversified portfolio is important to many investors. With an index fund, investors get a straightforward, low-cost way to gain exposure to the market.

An index fund is a type of mutual fund that is designed to match the performance of a specific market index, such as the S&P 500, the municipal bond market, or even the total stock market.

An index fund includes the same investments as the market index it tracks. Unlike actively-managed mutual funds that seek to outperform a benchmark index, the goal of an index fund is to mirror the index.

Index funds are often a foundational investment, especially for long-term investors who aren’t trying to outperform the stock market with active stock picking.

The benefits of investing in an index fund include:

• Lower costs: Because they don’t require an active manager to pick and choose stocks, index funds tend to have lower expense ratios than traditional mutual funds. This helps you keep more of your investment returns over time.
• Diversification: Because an index fund spreads your investments across a wide variety of companies, sectors, or assets, it can reduce the impact of any single security on your portfolio’s performance.
• Competitive returns: While individual stocks or narrow sectors can have wide volatility and lose significant value, the broad market tends to increase in value over the long term. In addition, passively-managed index funds that match the market tend to outperform actively-managed funds that trade stocks more. For example, the S&P 500 index has outperformed an average of 65%¹ of all active large-cap U.S. equity funds over the past 24 years. (Remember, past performance is not indicative of future results).
• Simplicity: Rather than invest in multiple funds, an index fund gives you a ready-made portfolio that is simple to track.

The drawbacks of an index fund include:

• Market risk: Since an index fund tracks an overall market, its value can decline during a market downturn.
• Limited flexibility: Because an index fund is passively managed, an active manager can’t proactively adjust the fund’s holdings to respond to market conditions or take advantage of new opportunities.

To get started with index funds, first determine which index you would like to track. Some index funds track a specific sector like healthcare or technology, specific asset types like bonds, specific company sizes (small-, mid-, or large-capitalization), specific geography, or the market as a whole.

Next, look for an index fund that is an open-ended fund. This means it is always available for new investors, compared to a closed-end fund that only accepts investors during a specific period and tend to be more actively managed.

Keep in mind that not all index funds are created equal, even if they track the same index. Some index funds have a fee, while others are fee-free. Even a small fee can have a long-term impact on returns.

Article Footnotes

¹ SPIVA U.S. Scorecard, S&P Dow Jones Indices, Year-End 2024

CRC# 4303740 03/2025