Index fund
A fund that simply mirrors a market index rather than trying to pick winners.
An index fund buys every security in a chosen index in the same proportions. There is no analyst deciding what looks cheap — the fund holds the market as it is.
The logic is that most active managers fail to beat their index after fees over long periods. If outperformance is unlikely, minimising cost becomes the most reliable way to improve returns.
Index funds come as both listed ETFs and unlisted managed funds. The underlying approach is identical; the difference is how you buy and sell them.
Index funds also reduce a subtler risk: manager risk. Choosing an active fund means betting on a particular team continuing to perform, and staff changes or style drift can undermine the reason you invested in the first place.
What a fee difference costs
On $200,000 over twenty years, paying 1.5% a year instead of 0.2% costs roughly $2,600 in the first year alone — and compounds relentlessly from there.
The bit people get wrong
Index investing guarantees you match the market, including every downturn. It is a strategy for capturing long-term growth cheaply, not a way to avoid losses.
Common questions
Is index investing better than active management?
Evidence consistently shows most active funds underperform their benchmark after fees over long horizons. Indexing accepts market returns in exchange for near-certainty about cost.
Which index should I track?
Broad diversified indices covering the Australian and global markets are the common starting point. Narrow sector or thematic indices concentrate risk rather than spreading it.
Do index funds pay dividends?
Yes. They pass through the dividends of the underlying companies, usually with franking credits attached for Australian holdings.