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Indexing is an investment approach that tracks the performance of a selected market benchmark, or index.
An index fund maintains a portfolio of stocks that closely resembles the structure of the underlying market. Ideally, the portfolio would include all the stocks in the given market but that is not always practical. More often, the portfolio will contain the companies with the largest market capitalization and the fund will approximate the market in the key characteristics.
The advantages of an Index fund over Managed funds is the cost. There is no active portfolio management as such. No trying to beat the market. Corrections in the portfolio are performed only when the market structure changes. This results in low or none transaction fees, management fees, and performance fees. These savings in cost can have a significant effect on the portfolio performance.
Indexing can be done on various benchmarks. They can follow a certain market, or an industry, or market capitalization (large stock, small companies, growth, income, real estate, etc.).
