The investor has two basic choices when it comes to mutual funds: indexed or passively managed and actively managed. From those two types of funds, all the numerous categories rise.

Index funds are basically a basket of stocks or bond whose performance is designed to replicate a segment of the market. This is called the benchmark. Index funds make no claim to beat the market but instead come as close as possible less the fees the fund charges. It promises low-cost and transparency.

Actively managed mutual funds have numerous hurdles to overcome in pursuit of matching the market benchmarks let alone beating them. They charge higher fees and don’t give the investor much in the way of transparency until the quarter concludes.

One thing is seldom mentioned in the active vs. passive debate: style drift. Simply, style drift represents a change in investment holdings from one quarter to the next. And not so simply, most mutual funds have a charter and a designated benchmark/index to achieve to prevent this.

But sometimes, the manager shifts the portfolio from one indexed category to another. In other words, if the fund you had purchased for its exposure to small cap stocks experienced a drift in style and started purchasing mid cap stocks, it would become a different fund.

This is one of many advantages to index fund investing. Once indexed, the fund remains the same. Here are some of the other things you need to know about this investment.

What are index funds?

An index fund is a basket of stocks or bonds that tracks a published index. By design, this gives the investor a clear view of the markets.

The index fund was not, as many may assume, invented by John Bogle, founder of the Vanguard Group. Instead, it was his desire to create a way for investors invest across broad expanses of the market at the lowest possible cost that led to the first index fund. He had worked on this concept long before the introduction of that first index fund but was unable to actually create it. It wasn’t until stronger computing power caught up with the idea that Bogle was able to finally make this investment available to the public.

Index funds, like their actively managed counterparts are investments that pool money from like minded investors. This shared approach is not only more economical, it also allowed investors who may not of otherwise had access to the markets, an excellent entry point.

Early on, Bogle understood that differences in cost mattered. Because index funds have no management interference and basically track a published index, the fees are almost non-existent.

Why should you consider index funds?

Every investor should consider three basic points when approaching the markets. First, the markets are not an abstract entity. They consist of people who make good and bad decisions. Each of those participants seeks to profit from the bad decisions by making better ones. This is incredibly difficult to do on an individual basis.

Secondly, in order to profit over the long term, those good decisions must be consistent. The investor is not just trying to beat another individual in reaching that goal, she/he is trying to beat all of the investors in the market. The most cost-effective way of doing that is to pool your money in a mutual fund.

And once that decision is made, the third point to consider is which fund can remain consistently profitable over the long-term. This leaves only two types of funds to consider, the actively managed mutual fund or a fund that tracks an index.

Both attempt to provide a long-term returns. That leaves the decision of which fund can do what the investor wants but cheaper. This side-by-side comparison gives the the index fund an unavoidable advantage. The benefits of a mutual fund environment and a low-cost access to the markets.

How can index funds be cheaper?

Although all index funds will list a manager or team of managers at the helm of the fund, the presence or impact of the fund manager is almost non-existent. There is no need to be involved in the fund.

Once the index is purchased, it only changes when the published benchmark does. No manager to speak of, no trading throughout the year, and no attempt to beat the markets all combine to make the investing in an index fund almost free.

Do index funds beat the market?

Even though index funds are inexpensive to own, they do have some fees they need to pass on to investors. Because of those costs, the index fund will come within a hair’s breath of matching the benchmark it tracks.

This so-close-to-the-benchmark performance makes the job actively managed funds have to do so difficult. Those funds must overcome higher fees to do match an indexed market. In any given year, only about a third do manage to perform better than the comparable index.

Can an actively managed fund beat an index?