Here are the disadvantages of an index fund.

It is difficult to outperform the market returns. While there are funds that introduce leverage to address this, they tend to incur greater losses in a bear market and fail to perfectly track the index in the long run.

However, this is not a drawback unique to index funds. Most funds fail to even achieve the returns of index funds. Take the legendary Wall Street investor Peter Lynch’s Magellan Fund, for example. While Peter Lynch managed the fund, it outperformed most index funds. But after his retirement in 1990, the fund’s return from 1995 onwards was 163%, falling short of the 201% return of the Vanguard Fund, a leading index fund in the US. Throughout the 1980s and 1990s, only about 10% of funds achieved higher returns than the Vanguard Fund. Simply tracking the S&P 500 index would have placed you in the top 10% of returns.

Redemption risk is significant. Most products allow individuals, rather than experts, to arbitrarily determine the redemption timing. Without basic financial knowledge, this can often result in substantial losses.

This, too, is not a drawback unique to index funds. It is a common issue in most funds that receive investments from multiple individuals. In the case of the aforementioned Magellan Fund, the fund itself had high returns, but most investors incurred losses because they could decide the redemption timing themselves. Investors often bought at high prices and sold at low prices, leading to losses despite the fund’s high returns. This risk is not exclusive to index funds but also applies to active funds and direct stock investments.

There is also the issue of the time lag between redemption and cashing out. If the redemption amount is determined based on the closing price on the redemption day or even 1-2 days later, a sudden event, such as the 9/11 attacks, could result in massive losses if the stock market plummets.

Again, this is not a problem unique to index funds. In such extreme volatility, most funds would suffer losses regardless of the type of fund chosen.