This Account Could Make It Easier to Start Investing | Personal-finance

April 18, 2021

Index funds are massively managed funds that aim to track the performance of the market indexes they're associated with. An S&P 500 index fund, for example, will have the goal of performing as well as the S&P 500 itself.

Index funds really take the pressure off for new investors -- namely, because they're the perfect "set it and forget it" type of investment. And since 401(k)s work the same way -- you fill out some paperwork with your payroll administrator and then let them take care of the rest -- it's a simple, easy formula to kick off your investing career.

Now one thing you should know is that 401(k)s generally offer a mix of actively managed mutual funds and index funds. The difference between the two is that index funds are passively managed -- they don't employ fund managers to hand-pick investments, and as such, they don't have to pay the high salaries that such experts generally command. As such, index funds charge very low investment fees (which are called expense ratios), whereas actively managed mutual funds charge a lot more because you're getting access to experts who are choosing your investments for you.

But worry not -- index funds are not second-tier investments. In fact, index funds routinely outperform actively managed mutual funds despite costing a lot more.