Index funds transcend theme or asset based classes - they currently appear in two equity-based sectors of the JSE and track a range of different indices. They are mathematically driven unit trust funds that buy all the shares in a given index according to their respective weightings. This means they rise as the index is rising and fall when the index is falling.

The rationale behind these funds becomes clearer when investors understand that in most developed markets, it is difficult to outperform the market. Often quoted figures state that only 25% of US fund managers outperformed the S&P 500. In mitigation, it is very difficult to outperform a super liquid and super efficient market index like the S&P 500 or the FTSE.

Index funds tend to have lower initial charges and management fees.

Analysts believe that as the JSE becomes more liquid, it will become more efficient - which will increase the possible outperformance of index funds.

Index funds can either fully replicate a given index, or specific equities can be chosen. The JSE All Share index is weighted to commodities (about 35%), which means the performance index funds which track the All Share should mirror the performance of the commodity cycle.

Index funds should not be compared with one another unless they seek to follow the same index. Index funds are measured according to how closely they track a given index.

Funds of funds are unit trust funds that invest in other unit trusts. Typically a Fund of funds contains three other unit trusts - they are legally required to invest in more than two component unit trust funds.

Funds of funds are designed to suit the needs of investors with a particular risk profile, and have been described as the "unit trust management company response to wrap funds." There are "aggressive funds of funds", "balanced funds of funds" and "managed flexible funds of funds".

There are two kinds of funds of funds. "In-house" funds of funds invest in only the unit trust funds of a particular unit trust management company.

Funds of funds can be more expensive than other types of unit trusts because there can be a double layer of costs. However this is not always the case - "in-house" funds of funds usually dispense with the second layer of costs and some of the more competitive unit trust management companies absorb the "second layer costs".