An index fund is a passively-managed fund with its AUM invested in a benchmark index such as the Nifty50 and the Sensex, in order to replicate the performance of the benchmark index.
The advantages of investing in index funds include:-
- Diversification, as the AUM is invested in all the constituents of the benchmark index.
- A lower expense ratio, as it is a passively-managed fund. The lack of active buying and selling and selecting of securities reduces the expense ratio.
The disadvantages of investing in index funds include:-
- Vulnerability to market fluctuations, as index funds suffer from market swings and crashes just like the benchmark index