FOR MANY INVESTORS -- particularly young ones just starting out -- index funds are by far the easiest, most effective way to go. They have the lowest fees, they are tax efficient and you don't have to worry about what the fund manager is doing. If your goal is long-term growth without having to pay much attention, these workhorse funds are the best solution.

How do they operate? Technically, index funds do have fund managers, but they don't do a heck of a lot. They simply buy all the stocks or bonds in a chosen index with the goal of matching that group's performance. What's an index? It's a grouping of stocks chosen to represent a certain market segment. The S&P 500 index, for instance, is comprised of large stocks. The Nasdaq Composite index is heavy on technology companies. By purchasing either index, a fund tries to mimic the returns of that particular segment. (See our Stocks course for more on how stocks behave.)

Sounds boring, but it works. Consider the Vanguard 500 Index fund. By the end of 1998, it had become the second biggest fund in the world -- with $74 billion in assets -- largely because investors flocked to its exceptional 24% five-year annual return. By merely mimicking the S&P 500, it beat 97% of the "active" fund managers out there over the same period.

A really good fund manager should be able to beat the index. But index funds have another advantage: low expenses and tax efficiency. Since the fund manager doesn't have to look actively for stocks, these funds are relatively cheap to run. And low turnover limits tax liability (see Cost Control). The Vanguard 500 Index fund, for example, has an incredibly low annual fee of 0.18% of your investment. An average large-cap fund like SunAmerica Blue Chip Growth can charge more than seven times that much.