Index funds are typically referred to as “passive investing” because the fund manager only needs to track a relatively fixed index of securities. Compared to actively traded funds, index funds require less trading, charge lower fees and expenses, and return lower realized capital gains. Index funds consistently outperform most actively managed mutual funds.

The investment strategy of index funds varies: some index funds invest in all of the companies included in an index, while others invest in a representative sample of the companies included in an index.

            Pros:

• Since the index fund tracks a particular stock index, there is no need for actively managing the fund. This means it costs less to manage an index fund. Expense ratios on index funds are generally well below the overall average of mutual funds.
  

- Index funds are easy to understand. By simply tracking the financial index that your index fund is in, you will know what your returns will be.

- An index fund can incur turnovers due to the selling and buying of funds by the fund manager. This might incur capital gains tax charges in some instances, but since index funds are passive investments, the turnovers are lower than actively managed funds.

- An index funds allows an investor to diversify his holdings depending on the stock index.

Cons:

- An index fund is designed to match the performance of its target index. This means there is virtually no chance of outperforming the index. A good index fund will generate a return similar to the index, minus fund costs.

- An investment in an index fund does not make an investor immune to volatility in markets.

- As the stock index changes its holdings, an index fund faces the prospect of selling all the stock that has been removed from the index and purchasing the stock that was added to the index. The S&P 500 index has a typical turnover of between 1% and 9% per year. This can lead to losses, however small, and offset the low costs of index funds

• Many index funds have stricter rules on the frequency of trading than most mutual funds, and early redemption fees can be fairly large.