What is an index?
An index measures the performance of a group of investments. Some well-known examples are:
- FTSE 100: the 100 largest companies listed on the London Stock Exchange
- S&P 500: 500 large companies listed in the US
- Global indices: thousands of companies across many countries.
How index funds work
An index fund buys all, or most, of the investments in an index, so its performance follows the index up and down. It doesn't try to pick winners, which is why index funds are also called tracker funds or passive funds.
By contrast, an actively managed fund pays a manager to choose investments in the hope of beating the market. That usually costs more.
Some index funds are exchange-traded funds (ETFs). These are bought and sold on a stock exchange, like shares, but work in a similar way.
Why many beginners use them
- They spread your risk: one fund can hold hundreds or thousands of companies.
- They're low cost: there's no expensive team picking investments.
- They're simple: you always know what you own, because you own the index.
Studies have found that, over long periods, many actively managed funds don't beat their index once fees are taken into account.
Why fees matter so much
Every fund charges a yearly fee, usually shown as the ongoing charges figure (OCF). Your investment platform may charge its own fee on top. Small differences add up over time.
For example, if you invest £100 a month for 30 years with 5% yearly growth, a fund charging 0.2% a year could grow to about £80,200. The same investment in a fund charging 1% a year could grow to about £69,400. That's a difference of around £10,800, just from fees. Try your own figures in our compound interest calculator.
- Kept by you with 1% fees£69,400
- Lost to the extra 0.8% in fees£10,800
What to check before you choose
- Which index it tracks: a fund that tracks a single country concentrates your money in one economy. A global fund spreads it more widely.
- The total cost: add the fund's ongoing charge to your platform's fees.
- Accumulation or income: accumulation funds reinvest any dividends automatically, while income funds pay them out to you.
- Currency: funds that invest overseas can rise or fall as exchange rates change.
The risks
An index fund follows the market down as well as up, and there's no manager trying to avoid falls. Many global indices also have a large share of their money in a small number of very big companies, many of them in the US. As with any investment, you could get back less than you put in.
Common questions
Are index funds safe?
No investment is risk-free. Index funds spread your money widely, which reduces the risk of any single company doing badly, but their value still rises and falls with the market.
What's the difference between an index fund and an ETF?
Many ETFs are index funds. The main difference is how you buy them: ETFs trade on a stock exchange throughout the day, while traditional index funds are usually bought and sold once a day at a set price.
Can I lose money in an index fund?
Yes. If the market falls, your fund will fall with it. That's why index funds are best suited to money you won't need for at least five years.
Sources
We checked this guide against these sources on 8 October 2026. Rules and allowances can change, so always check the latest position on GOV.UK.
This guide is general information, not personal financial advice. Read our full disclaimer.