An index mutual fund attempts to replicate the performance of an index. This can be any index, such as the S&P 500, the Nasdaq 100 and so forth. These funds buy the same stocks that are in the index and weight them the same way the index does.
These types of index funds are very popular because they tend to perform better than actively managed funds. Fund managers simply have a hard time beating the market consistently. A manager's picks may outperform an index one year, then fail to keep up with it the next. In addition, index mutual funds have lower costs because they don't buy and sell securities as often as an actively managed fund does.
So how do you find these funds?
Top Places to Search
Two easy-to-use sources for finding index funds are Fidelity Investments and Vanguard. The best way to access information on index funds from Fidelity is to go to their website and enter "Index Funds" in the search box. This will take you to a listing of their index funds. By clicking on a fund name, you will bring up a screen with a list of data links that provide a very comprehensive picture of a fund's investment features.
The same approach is recommended for Vanguard, which is generally considered to be the leading fund company in the index field. On the home page, click on Personal Investors, then Vanguard mutual funds and exchange-traded funds (ETFs) and then Index Funds Only to get their complete listing. Like Fidelity, the information on individual funds is very detailed and informative.
If you have a premium membership with Morningstar, you can access its index fund listing and then go straight to a Morningstar fund report to get its complete, objective analysis of an index fund's investment qualities.
Picking a Winning Index Mutual Fund
Choosing an index fund is easier than choosing an actively managed one. You need to measure how well the fund has performed against its benchmark index. Simply compare a chart of the index to that of the fund. If a fund failed to match the index, cross it off your list. Of the ones remaining, look at expenses. It should not cost much to manage an index fund, because the manager is passive. The manager buys or sells according to how the index gets adjusted. Such adjustments do not happen frequently. So compare expenses. All other things being equal, the one with the lowest cost is a good choice. Make sure you are comparing funds that track the same index.
The Bottom Line
Index mutual funds can be a solid, fairly predictable investment. Your fund will drop in value when the underlying index does, but it will recover when the index fund does as well. This is a buy and hold investment. There is little point to jumping in and out of an index fund, because you are very unlikely to beat the index this way. (See also: Index Investing, The Lowdown on Index Funds and Enhanced Index Funds—Shiny Paper or Sparkling Gift?