What is an index fund, and how does it work?

An index fund is essentially a mutual fund or an exchange-traded fund (ETF) that mirrors the composite and performance of a benchmark index, like the Dow Jones Industrial Average and the Nasdaq Composite Index.

Whether you are purchasing shares or units, investors' capital is poured into all the companies listed in the portfolio.

The chief benefits of an index fund consist of diversification and allowing passive traders an opportunity to engage in a "set it and forget" investment strategy.

Index funds also are cheap to own since they are passive instruments.

Plus, with many index funds, you can earn a monthly or quarterly income through dividends.