Index tracker unit trusts aim to provide average returns while eliminating fund manager risk. They offer an alternative to actively-managed funds, all of which have a fund manager who selects shares for the fund and who is paid for this service using the funds management charges.

Index-tracking funds simply aim to mirror the performance of a particular stock market index or sector index - either by holding shares in all the companies that are included in the index, or in a representative sample of those companies. Actively managed funds aim to hold shares that can do better than the stock market - but very few achieve that aim consistently.

Most funds are actively managed, but trackers are a fast-growing sector of the market and offer compelling advantages.

• Index tracker funds take the guesswork out of investment - instead of trying to beat the market, they join it.
• Index tracker funds remove the risk of doing worse than the stock market - they simply follow the market while most actively managed funds fail to beat the stock market index over the longer term.
• Index tracker funds are usually low cost, typically costing nothing to buy and 1 per cent a year or less to run.
• Index tracker funds remove the risk of choosing an underperforming fund, making trackers a safer option than actively managed funds if you don't want to take advice or do much research before buying.
• Index tracker funds make a good base for a portfolio, to which you can add actively managed funds investing in particular areas.

• Index tracker funds follow the market down as well as up - most active funds can't avoid doing the same to some extent, but may offer some defence.
• Index tracker funds will never do better than the index, whereas active funds can and do, although not consistently.
• Index tracker funds are only as good as the index they track, and some indices are not a very good proxy for the market they represent.

How reliable are index tracker funds in ISAs?
And not all index tracker funds even live up to live up to their tracking objectives. A survey in 2001 by investment adviser Chartwell suggested that index tracker unit trusts cannot be relied upon to track accurately, with charges not always as low as they should be. As the table below shows, index trackers unit trusts investing in the UK FTSE indices diverged from index performance to a surprising degree.

Over five years, the best performer, Fidelity Moneybuilder UK, outperformed the All-Share by almost 4 per cent. Over the same period the worst performer was Deutsche’s UK Equity Index unit trust, which was almost 20 per cent down.

All index tracker trusts should underperform the index slightly because they have charges built in to the unit price, whereas there are no charges on the index. But a divergence of up to 20 per cent over five years is alarming. These statistics cast a lot of doubt on whether tracker trusts really do what they are supposed to do: remove the risk of choosing a fund manager who will underperform. It seems that there is fund manager risk attached to index investment as well.

How much do index tracker funds cost?
Though there are 17 UK index tracker funds in the survey which make no initial charge, there are still six which have an initial fee of more than 3 per cent.

Putting together charges and tracking accuracy, the top four All-Share trackers are Fidelity Moneybuilder UK (zero per cent initial/0.5 per cent annual), Legal & General UK Index Tracker (zero/0.5 per cent), Hargreaves Lansdown FTSE All-Share (zero/0.25 per cent) and Dresdner UK Index (zero/0.5 per cent).