A big question then is whether it is worth spending time and resources trying to pick market beating stocks. So once costs that are consumed by all the financial intermediaries in the system are considered, then gross returns of the market will be lower by the amount of cost. The beauty of an index fund lies in its sheer simplicity, as it does not aim to beat the market but provide returns similar to the index it is tracking, thereby minimising costs. In the US, costs of index funds vary between 0.10-0.20 per cent of the corpus while for actively managed funds it is about 1.25 per cent. These savings are directly passed on to the investor.
Index funds are an altogether low risk proposition as they diversify across stocks and sectors.
They are transparent as the portfolio is predefined. They allow investors to benefit from all the feverish activity in the markets while incurring only a fraction of the costs and risks. The gaining popularity of index funds is not to undermine the relevance of active investing because if all assets were indexed, then information would not be fully utilised. As a result, the markets would be inefficient. However, the value of any service should be measured with respect to the returns it provides.