Here is the reason Index funds are so famous and the reason investors chose them over traditional mutual funds. As a result index funds are one of the hottest products in the world of investment.

One thing is certainly true in the world of investment that index funds continue to take fund sharks' share of new investment capital that comes into the stock market. Passive index funds grew from 2009 to 2016 in every one single year as investors added more money to low-cost funds. At the same time, active funds encountered outflows as clients pull more cash out at a quicker rate than new cash is invested into them and the stage of outflows accelerates.

Industry Focus: Financials' edition showed that it join The Motleys Fools' Gaby Lapera and Jordan Wathen on their discussion about essential facts that you need to know on investing index funds and what are its features that made it popular and a great investment for retirement.

According to Wathen, an index fund is any kind of fund that invests in an index and isn't actively managed. An actively managed fund hires portfolio managers and analysts to find good stocks and bonds that they think will make great investments, and they generally seek to outperform the market, or outperform a benchmark.

On the other hand index funds just buy the index, and if a client buy a traditional S&P 500 index fund, such as S&P 500 of Vanguard, it buys and sells all the stocks in the S&P 500. That's all it goes and works. If a stock is phase out from the S&P 500, then the fund sells it. On the other hand if a stock is added to the index, then the fund buys it.

Wathen added that people call it as "diworsification," which runs on diversification. Thinking about the legendary investors of the world such as Warren Buffet, he will never who he is today if you made him go buy 1,000 stocks. His name would not even exist and no one would ever know him, if he had to in a given time, manage 1,000 stocks. His returns would have not necessarily been good or bad, but this guy made a fortune for the reason that he was super concentrated into his best ideas. As a client if you buy an index fund by definition, be super invested to become the next Warren Buffet.