"Invest with rules, not intuition. Calculate. Don't speculate." - Mark Hebner

Definition:

Index funds are mutual funds with specific and clearly defined rules of ownership and the rules are held constant regardless of market conditions.

For example, a Small Value Index Fund will have a clear set of rules that define small and value. However, those rules are not the same for all small value indexes. Vanguard (S&P 600 Barra Value), Dimensional Fund Advisors, Russell, and Wilshire all have small value indexes. However, each one of them has a different set of rules of ownership and therefore different risk and returns.

Index Fund Advantages:

The annual expenses and fees of index funds are one-tenth to one-third that of actively managed mutual funds.
Actively managed funds, when adjusted for risk, do not outperform the appropriate index by enough to cover the cost of their higher trading costs and taxes.
If a fund claims higher returns than an index, they took more risk, either through stock concentration or style drift.
Lower returns are the result of higher transaction costs and higher fees or lower risk.
Claims of higher returns are the result of inaccurate benchmarking, which is the measurment of risk. Also, many costs of actively managed funds are overlooked, such as loads and taxes.
Index fund managers don't buy and sell as often as managers of active funds, resulting in lower capital gains distributions and therefore lower taxes. Tax-managed index funds nearly eliminate all tax liability, due to dividend and capital gains management.