Funds and index funds

Lesson 6 of 12 in our free Investing Basics guide: a 5-minute money game with the key points below.

This lesson is in the full version.

Free with a code from your uni, college, council, landlord or employer (worth £600/year). Lesson 1 of Investing Basics is free for everyone.

Questions you'll answer

What does an index actually measure?

Aims to match a stock market index → Index (tracker) fund. That's the tracker's whole job.
A manager picks shares they think will beat the market → Active fund. Active management.
Usually has lower ongoing charges → Index (tracker) fund. No star manager to pay — usually cheaper.
Might beat the market, might lag behind it → Active fund. Active can do better or worse than the index.
Fact: “An index fund can still fall in value.” — If the market falls, so does the tracker. It's diversified, not protected.
Fact: “Funds let small investors spread risk across many holdings.” — Pooling money makes diversification possible with small sums.
Myth: “Active funds always beat index funds because experts run them.” — Many don't, especially after their higher fees are taken into account.