All mutual funds, including index funds, have expense ratios or annual fees that you pay to own the fund. This is usually a percentage of your assets, so if you’ve invested $ 100 in the fund and it has an expense ratio of 1%, you’ll pay $ 1 that year. A 1% expense ratio might not seem that bad, but it can get expensive, especially as you invest more and more in the fund.

Index funds often have expense ratios well below 1%, while some actively managed funds may have expense ratios of 2% or more. So even in a scenario where an index fund and an actively managed mutual fund get the same rate of return in any given year, the index fund wins because you pay less to own it.

Index funds have their ups and downs just like any other investment, but they often outperform many actively managed mutual funds. In 2008, Warren Buffett made a million dollar bet that a S&P 500 The index fund could outperform five of the best actively managed mutual funds in the hedge fund industry over 10 years. He won. But he hasn’t always led all the way.

With any investment, you must be prepared to accept certain risks and be confident that in the long run you will increase your wealth. While the past is not an indicator of future performance, it can be reassuring, especially for new investors, to know that many stock market indices on which index funds are based have moved higher over time.