Which of the following is NOT a rationale for investing in index funds? A) Minimize risk. B) Minimize transactions costs. C) Efficient financial markets. D) Active mutual fund managers underperform index funds. The correct answer was A) Minimize risk. The minimization of risk is not a rationale for investing in index funds. I thought buying index fund is to diversify to reduce risk. Not sure why A is correct?

this is not the answer i would have picked, but my guess is that this is the answer because there is absolutely no guarantee that the market won’t go down

Because the returns from the Indexed-Funds are linked to the level of the Index (say S&P-500) and the index has an equal un-biased probability of going up, as it has for going down. So how do you think we can hedge-off some risk by investing in a indexed-fund. So ‘A’, indeed, is the best answer… So if we can’t beat the market (according to EMH), atleast follow it… - Dinesh S