An index fund is a type of investment fund that tracks a specific market index — such as the FTSE 100, the S&P 500, or the MSCI World. Rather than a fund manager actively picking stocks, an index fund simply holds all (or a representative sample) of the companies in its chosen index. When the index goes up, the fund goes up. When it falls, the fund falls.
How does an index fund work?
When you invest in an index fund, you’re effectively buying a tiny slice of every company in that index. For example, a FTSE 100 index fund holds shares in all 100 companies listed on the London Stock Exchange’s main market — from HSBC and AstraZeneca to BP and Unilever. Your returns reflect the collective performance of those 100 companies.
This automatic, rules-based approach means index funds require no active management decisions — which is why they’re often referred to as passive funds.
Why are index funds so popular?
Low costs. Because no fund manager is making active decisions, index funds charge much lower annual fees than actively managed funds. A typical index fund charges 0.1–0.2% per year; an actively managed fund might charge 0.75–1.5%. Over decades, this cost difference compounds into a significant difference in returns.
Broad diversification. A single global index fund can give you exposure to thousands of companies across dozens of countries. This means the failure of any one company has a minimal impact on your overall investment.
Consistent performance. The majority of actively managed funds underperform their benchmark index over the long term, particularly after fees. Index funds, by definition, match the index — which means they outperform most active funds over time.
What’s the difference between an index fund and an ETF?
Both index funds and ETFs (Exchange Traded Funds) can track the same indices — the key difference is how they’re bought and sold. Traditional index funds are priced once per day and bought directly through a fund platform. ETFs trade on a stock exchange throughout the day, just like individual shares. For most long-term beginners, the difference is minimal — what matters more is the underlying index and the annual charge.
Which index funds are available in the UK?
The most commonly used indices by UK investors include:
- FTSE 100 — the 100 largest companies on the London Stock Exchange
- FTSE All-World — thousands of companies from developed and emerging markets globally
- MSCI World — large and mid-cap companies from 23 developed countries
- S&P 500 — the 500 largest US companies
Most beginner investors opt for a global index fund (FTSE All-World or MSCI World) for maximum diversification, rather than limiting themselves to UK companies only.
How do I invest in an index fund in the UK?
You invest in index funds through an investment platform or broker. The most tax-efficient way for most people is inside a Stocks and Shares ISA, which shelters all growth and income from UK tax. You can also invest through a SIPP (pension) for additional tax relief.
Choose a platform, open an account, deposit money, search for your chosen fund, and invest. Most platforms allow regular monthly investments via direct debit from as little as £25.
What are the risks?
Index funds are not risk-free. The value of your investment will go up and down with the market — in a significant market downturn, your fund could fall by 30–40% or more in a short period. The key is holding for the long term. Historically, diversified global index funds have recovered from all major market downturns and gone on to new highs — but past performance is not a guarantee of future results.
Frequently asked questions
What is an index fund in simple terms?
An index fund automatically tracks a market index by holding the same companies in the same proportions. When the index rises, the fund rises. It’s a simple, low-cost way to invest across many companies at once.
Are index funds safe?
Index funds carry investment risk — the value can fall as well as rise. They are considered lower risk than investing in individual company shares because they’re diversified across many companies, but they are not as safe as cash savings.
What is the best index fund for beginners in the UK?
There is no single best fund — it depends on your goals and platform. A low-cost global index fund tracking the FTSE All-World or MSCI World is a widely recommended starting point for UK beginners seeking broad diversification.
How much does an index fund cost?
Index fund annual charges (called the Ongoing Charges Figure or OCF) are typically 0.05–0.25% per year. This is deducted automatically from the fund — you don’t pay it separately.