Index fund

A mutual fund that holds the shares of an index in the index's own weights, aiming to match its return rather than beat it. Units are bought from and sold back to the fund house at the end-of-day net asset value, so no demat account or exchange trade is needed.

Its case is cost and arithmetic. Before costs, the average actively managed rupee earns the market's return, so after costs the average active fund must trail an index fund that charges less. A Nifty 50 index fund charging 0.2% a year against an active large-cap fund charging 1.5% starts every year 1.3 percentage points ahead.

Two numbers show how well one is run: its expense ratio and its tracking error, the variation of its return around the index. A low-cost fund with a high tracking error isn't delivering what it promises.

Every active fund has to beat this.