Investing is an effective way to let your money work for you and build wealth beyond simply holding cash or savings.
Both saving and investing have their place, but investing allows your money to grow over time through compounding and long‑term market growth. For this reason, long‑term investments should be a key part of your financial planning.
However, choosing individual investments can feel overwhelming. It can be difficult to achieve stability and diversification on your own. This is where index funds become a key option, offering broad market exposure.
What Exactly Is an Index Fund?
An index fund is a type of mutual fund or exchange‑traded fund (ETF) that collects money from many investors and uses it to purchase a diversified set of financial assets. These funds are designed to match or track the components of a specific financial market index.
The key idea to get to know index funds is as simple as Index funds aim to mirror the market and capture growth.
Thus, they try to minimize tracking errors, which are the differences between the fund’s performance and the index it follows. By tracking an index, these funds offer consistency, broad diversification, and a reliable benchmark over time.
A popular example you may have heard of is the S&P 500, which tracks 500 of the largest publicly traded companies in the United States. An index fund that follows the S&P 500 attempts to replicate the performance of this broad market index, with large firms like Nvidia, Apple, and Microsoft, which have a stronger impact on the index’s movements. Chosen by a committee based on factors such as company size, liquidity, and representation across industries.
While index funds seem straightforward, it’s still important to research your options and choose what aligns with your goals. Speaking with a financial advisor or conducting your own research is a great place to start. Investing earlier is almost always better than waiting.
Are Index Funds Good Investments, and Why?
Index funds offer several advantages that make them appealing to long‑term investors:
Market Representation: Index funds reflect the performance of the broader market or a specific segment of it. This allows you to benefit from overall market growth rather than relying on the success of individual stocks.
Diversification: By tracking an index, you gain exposure to many companies or bonds at once. This reduces the risk associated with any single investment.
Transparency: Since Index funds replicate well‑known indexes, their holdings are easy to view on almost any investment platform. This makes it clear what you’re investing in and how it may fluctuate over time.
It can also have lower expense ratios as they simply replicate and have lower turnover as index funds trade less frequently than actively managed funds.
How to Invest
To get started, choose an investment platform. This could be anything from an online brokerage, a bank, or a fund provider. After creating an account, select an index fund that matches your comfort level and financial goals, then purchase shares.
Index funds are typically long‑term investments, so while they will likely fluctuate, it’s important to review them to ensure they still align with your objectives. It really can be that simple.
Consensus
Index funds offer many advantages that make them well‑suited for everyday long‑term investors. Over time, many have demonstrated strong, competitive returns often outperforming higher‑fee, actively managed funds.
While they do have limitations, such as less flexibility and exposure to market swings, their diversification helps reduce overall risk. If you’re interested in investing and want a straightforward, diversified approach, index funds are an excellent option to consider.
Take the time to speak with someone you trust or conduct your own research, and start investing in what best supports your financial goals.
Sources:
The EditorsRead bioWealthsimple’s education team is made up of writers and financial experts dedicated to making the world of finance easy to understand and not-at-all boring to read. (2025, December 4). How to invest in index funds. Wealthsimple. https://www.wealthsimple.com/en-ca/learn/how-to-invest-in-index-funds
Fernando, J. (n.d.). Index funds explained: How they mirror market benchmarks. Investopedia. https://www.investopedia.com/terms/i/indexfund.asp
Why can’t investors pick the right index fund? Barahona, Ricardo* January, 2024. (n.d.). http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2024-Lisbon/papers/IndexFundsJan2024.pdf
Which factors matter to investors? Evidence from mutual fund flows. Barber, B. M., Huang, X., and Odean, T. (2016). The Review of Financial Studies, 29(10):2600–2642