Index Funds for Beginners: What They Are and How to Start Investing
Index funds are the most recommended investment for beginners — and for good reason. They're simple, low-cost, and have outperformed the vast majority of professionally managed funds over the long term. If you've heard "just buy index funds" and wondered what that actually means, this guide explains everything.
What Is an Index Fund?
An index fund is a type of investment fund that tracks a market index — like the S&P 500, the total US stock market, or the total international stock market. Instead of a fund manager actively picking stocks they believe will outperform, an index fund simply holds all the stocks in the index it tracks, in proportion to their market size.
The S&P 500 index, for example, contains the 500 largest publicly traded US companies: Apple, Microsoft, Amazon, Alphabet (Google), Berkshire Hathaway, and 495 more. An S&P 500 index fund holds all 500, automatically. When Apple grows and becomes a larger percentage of the index, the fund's holdings adjust accordingly.
The fund doesn't try to beat the market — it is the market (or at least a large, representative slice of it).
Why Index Funds Are So Powerful
1. They consistently outperform active management.
This is the key insight. Over the long term, approximately 85-90% of actively managed mutual funds fail to beat their benchmark index after fees. This isn't a recent trend — it's been studied extensively for decades and the result is remarkably consistent.
The S&P SPIVA report tracks this year over year. In 2024, over 85% of actively managed large-cap US funds underperformed the S&P 500 over the trailing 20 years. Most fund managers — smart, well-paid professionals spending their entire careers analyzing stocks — can't consistently pick winners better than simply holding everything.
2. Fees are dramatically lower.
Active mutual funds charge expense ratios (annual fees as a percentage of your investment) of 0.5-1.5% per year. Some charge even more plus front-end load fees.
Index funds charge 0.03-0.15% per year. Vanguard's Total Stock Market Index Fund (VTSAX) charges 0.04%. Fidelity's Zero Total Market Index Fund (FZROX) charges literally 0.00%.
On a $100,000 investment over 30 years at 8% growth:
- 0.04% expense ratio: ~$975,000 final value
- 1.0% expense ratio: ~$761,000 final value
- Difference: $214,000
That's how much you're giving up to a fund manager who, statistically, is making your returns worse, not better.
3. Automatic diversification.
A single S&P 500 index fund gives you ownership in 500 companies across every major industry. A total stock market fund gives you 3,000-4,000 companies. You can't be wiped out by any single company going bankrupt — one stock going to zero affects 0.1-0.5% of your portfolio.
4. Simplicity.
You don't need to research companies, read earnings reports, or follow financial news. Buy an index fund regularly, hold it for decades, and let compound growth do its work.
Types of Index Funds
US total stock market funds — Track all publicly traded US companies. Examples: Vanguard Total Stock Market (VTSAX/VTI), Fidelity Total Market Index (FSKAX/FZROX), Schwab Total Stock Market (SWTSX/SCHB).
S&P 500 funds — Track the 500 largest US companies. Similar performance to total market with slight different composition. Examples: Vanguard 500 Index (VFIAX/VOO), Fidelity 500 Index (FXAIX), iShares S&P 500 ETF (IVV).
International stock market funds — Track stocks outside the US. Provides diversification across global economies. Examples: Vanguard Total International Stock (VTIAX/VXUS), Fidelity International Index (FSPSX).
Total world funds — Combines US and international. One fund, everything. Examples: Vanguard Total World Stock (VT), Fidelity Total International Index combinations.
Bond index funds — Tracks a bond market index. Lower expected returns than stocks, but lower volatility. Examples: Vanguard Total Bond Market (VBTLX/BND).
Mutual Funds vs. ETFs: What's the Difference?
Most index funds come in two forms: mutual funds and ETFs (exchange-traded funds). Both can track the same index; the structural differences are minor for most investors.
Mutual funds: Priced once per day after markets close. You buy and sell at that day's price. Often require a minimum initial investment ($1,000-3,000 for Vanguard mutual funds; $0 for Fidelity).
ETFs: Trade throughout the day on stock exchanges like individual stocks. You buy whole shares (though some platforms offer fractional shares). Generally have slightly lower expense ratios than equivalent mutual funds.
For a long-term buy-and-hold investor, the choice between an S&P 500 mutual fund and an equivalent ETF matters very little. Pick based on what's available in your account and whether minimums are a concern.
Where to Buy Index Funds
Fidelity: No account minimums, no trading commissions on index funds, and their own Zero-fee index funds (FZROX, FZILX). One of the best platforms for beginners.
Vanguard: The pioneer of index fund investing (founded by John Bogle, who created the first retail index fund in 1976). Excellent funds, but the platform interface is older and less beginner-friendly. Mutual funds require $1,000-3,000 minimums; ETFs (VOO, VTI) are available in any amount.
Charles Schwab: No minimums, low expense ratios, good platform. A strong alternative to Fidelity and Vanguard.
Betterment: A robo-advisor that builds index fund portfolios automatically based on your risk tolerance. Good for true beginners who want complete automation. Charges 0.25%/year for the service.
Robinhood: Allows investing in ETFs with fractional shares. Lower barrier to entry but fewer fund options and a less educational platform.
Where to Hold Your Index Funds
Roth IRA: For long-term retirement savings, this is usually the best starting account. Contributions are made with after-tax dollars, but all growth is tax-free. You withdraw in retirement with zero taxes. The 2026 contribution limit is $7,000/year ($8,000 if 50+). Open one at Fidelity or Vanguard if you don't have one.
Traditional IRA: Contributions may be tax-deductible (depending on income and whether you have a workplace plan). Growth is tax-deferred. Withdrawals in retirement are taxed as income.
401(k): Through your employer. Contributions are pre-tax. Many employers offer S&P 500 or total market index fund options. Maximize the employer match first.
Taxable brokerage account: For investing beyond retirement account limits. No tax advantages but no restrictions on when you can withdraw.
How to Buy Your First Index Fund: Step by Step
- Choose an account type — Roth IRA for most beginners (tax-free growth, no RMDs)
- Choose a platform — Fidelity or Vanguard for index funds; Betterment for automation
- Open the account online (15 minutes)
- Link your bank account and fund the account
- Choose an index fund — Fidelity users: start with FZROX (Total Market, 0% fee). Vanguard users: buy VTI (Total Market ETF, 0.03%) or VTSAX (requires $3,000 minimum)
- Set up automatic monthly contributions — the most important step
- Don't check it obsessively — check quarterly, not daily
A Simple Starting Portfolio
For most beginners:
Single fund simplicity: One total stock market fund (FZROX, VTI, or VTSAX). This gives you the entire US market. Simple, diversified, done.
Two-fund portfolio: US total market + International (80/20 split). Captures global growth. Slightly more complex but broader diversification.
Three-fund portfolio: US total market + International + US bonds (80/10/10 to 60/20/20 depending on age and risk tolerance). The classic Bogleheads approach.
Don't overthink it. The difference between a one-fund and three-fund portfolio is much smaller than the difference between investing and not investing.
The Most Important Thing: Start
The biggest mistake beginners make is waiting to invest because they don't feel ready, don't have "enough" to invest, or want to understand everything perfectly before starting.
You will never feel perfectly ready. The best time to start investing was yesterday; the second best time is today.
Starting with $100/month in a Fidelity Roth IRA invested in FZROX is infinitely better than starting with $500/month "someday when everything makes sense."
Time in the market beats timing the market. Every month you delay is compound growth you'll never get back.
Open the account. Buy the index fund. Set up automatic contributions. Then live your life. The market will do its thing over the decades, and you'll be far better off than if you'd tried to be clever about it.