An index fund is a type of fund designed to track the performance of a particular market as closely as possible.
The aim is to replicate the performance of that market, while keeping costs as low as possible, by setting the fund on ‘autopilot’, and reducing the need for expensive fund managers.
Index funds in Ireland
Thousands of index funds are available to the Irish investor.
There are index funds which track all sorts of markets, from global stocks and shares, to government and company bonds. It’s also possible to invest in index funds which track specific sectors such as healthcare, energy or technology. And there are index funds focused on individual countries and regions, from Japan to the US, to emerging markets and the Eurozone.
The move to passive investing
Index funds are a major form of passive investing – that is, minimising the cost and effort of investing by buying and selling investments infrequently, and holding investments for the long term.
In recent years, passive investing has become much more popular.
The central belief behind index funds is that over time, actively managed funds can never beat the index itself. Over the long term, the cost of paying the fund manager will weigh on the fund’s returns, dragging it below the performance of the index itself.
Should I invest in index funds?
In Ireland, there are still merits to using active management for many investors. But the move towards passive investing is driving down costs, and increasing returns, for all investors.