Index funds have become one of the most popular ways to invest in the UK, particularly for people who are new to investing. They offer a simple, low-cost way to gain exposure to a broad range of companies and markets, without requiring detailed knowledge of individual stocks or active management decisions.
This article explains what index funds are, how to invest in them in the UK, and what to consider before getting started.
What is an index fund?
An index fund is a type of investment fund that tracks a market index — such as the FTSE 100, the S&P 500 or the MSCI World. Rather than a fund manager actively selecting investments, an index fund simply buys and holds the same companies as the index it tracks, in the same proportions.
For example, a FTSE 100 index fund holds shares in all 100 companies in the FTSE 100, weighted by their market capitalisation. When one company grows and another shrinks, the fund automatically adjusts to reflect the changing composition of the index.
This passive approach has two key advantages over actively managed funds: lower costs (because there is no expensive fund manager to pay) and consistent performance that matches the index rather than risking underperformance through poor active management decisions.
Index funds vs ETFs
You will often hear index funds and ETFs (Exchange Traded Funds) mentioned together. They work on the same principle — tracking an index passively — but there is a structural difference. A traditional index fund is priced once a day and bought directly from the fund provider. An ETF is listed on a stock exchange and trades throughout the day like a share, meaning you buy and sell through a broker. For most long-term investors, this distinction is relatively minor — both offer low-cost index tracking.
What are the risks?
Index funds are not risk-free. Because they track a market index, their value rises and falls with the market. In a market downturn — such as the 2008 financial crisis or the early 2020 pandemic — index funds can fall significantly in value. The key to managing this risk is time: historically, stock markets have recovered from downturns over the long term, but there is no guarantee this will continue. Index funds are generally considered most suitable as long-term investments of five years or more.
You should also be aware that different indices carry different levels of risk. A global index fund spreading across thousands of companies worldwide is generally considered more diversified — and therefore less risky — than a fund tracking a single country or sector.
How to invest in index funds in the UK
Step 1: Choose an account type
The most tax-efficient way to hold index funds in the UK is within a Stocks and Shares ISA. Gains and income within an ISA are completely free from UK tax. Alternatively, you can hold index funds within a SIPP (Self-Invested Personal Pension) for retirement saving, where contributions benefit from tax relief. If you have already used your ISA allowance, a general investment account is also an option, though you may be subject to capital gains tax on profits.
Step 2: Choose a platform
To invest in index funds you need to open an account with an investment platform — sometimes called a stockbroker or investment provider. UK platforms that offer ISAs and index funds include established providers with different fee structures and fund selections. Platform charges vary — some charge a percentage of your holdings, others a flat fee. For smaller portfolios, a percentage-based fee is often cheaper; for larger portfolios, a flat fee may be better value.
Step 3: Choose your index fund
The most widely held index funds among UK investors track broad global indices, such as the MSCI World (covering large and mid-cap companies across developed markets) or the FTSE All-World (which also includes emerging markets). Both provide exposure to thousands of companies across dozens of countries through a single fund.
Look for funds with low ongoing charges — a fund's Ongoing Charges Figure (OCF) should ideally be below 0.5% per year for a broad index fund, with many available for 0.1% to 0.2%. Over long periods, charges have a significant compound effect on returns.
Step 4: Decide how much to invest and how often
Regular investing — putting a fixed amount in each month regardless of market conditions — is a widely used approach sometimes called pound-cost averaging. It removes the pressure of trying to time the market and smooths out the effect of short-term price volatility. Many platforms allow you to set up a regular investment instruction that invests automatically each month.
What to watch out for
Be wary of high charges — even a seemingly small difference in annual fees can substantially reduce returns over decades. Also be cautious of products marketed as index funds that are actually more complex or expensive than a straightforward passive tracker. Always read the Key Investor Information Document (KIID) before investing in any fund.