Index funds and ETFs are passive investment instruments. Both invest in stocks in the same proportion as their underlying market indices and thus mirror the risk and return of the indices. Index funds are very similar to open-ended mutual funds, where the fund manager invests in securities and replicates the underlying indices without security selection. As one makes investments and redemptions in these index funds, the fund manager manages cash for the investor and thus these funds will have a small tracking error in their performance.
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