A fund is a basket: instead of buying one stock, you buy a slice of hundreds at once. An index fund is the simplest basket there is. It does not pay anyone to guess winners. It just buys the whole list - every company in the S&P 500, for example - and holds it.
Two reasons. First, instant diversification: one bad company barely dents a 500-company basket. Second, cost. Running a fund that copies a list is cheap, so index funds charge a fraction of what a stock-picking fund charges.
Put $10,000 away for 30 years at 7% and you end with about $76,100. The same money at 6% - just one percentage point less, the kind of fee gap people shrug at - ends at about $57,400. That "small" 1% fee ate a quarter of your money. Fees compound exactly like returns do, only against you.
Mostly, no. S&P Dow Jones Indices tracks this in its SPIVA reports, and over 15-year stretches about 9 in 10 actively managed U.S. large-cap funds finished behind the plain S&P 500. Some managers win in any given year. Keeping it up for decades is a different sport.
The expense ratio - the annual fee, where lower is better - and what index the fund actually follows. "The market" and "a slice of the market" are not the same basket.
Sources: Investor.gov glossary: index funds; S&P Dow Jones Indices, SPIVA scorecards.
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