Which characteristic is true of an index mutual fund?

An index mutual fund is designed to replicate the performance of a specified index, such as the S&P 500 or the Russell 2000. This characteristic means that the fund’s portfolio is constructed to mirror the holdings and weights of the underlying index, providing investors with broad market exposure and a passive investment strategy. The primary goal of an index fund is to match, not outperform, the index it tracks, thus aligning its performance with that specific benchmark.

This approach to investing is typically associated with lower costs due to reduced management fees, as index funds do not require active management by a portfolio manager who makes frequent buy and sell decisions. Additionally, index funds offer diversification since they invest in a wide array of stocks within the index, enabling investors to spread risk across numerous sectors and companies.

Understanding this primary characteristic helps distinguish index mutual funds from actively managed funds, which involve more strategic trading and higher fee structures. Their passive nature and objective to follow a market index are key to their appeal among investors looking for a straightforward way to gain market exposure without the intricacies of active management.