The purpose of this report is to evaluate and validate passive investment strategies and the benefits of having index funds in your portfolio. The importance of the passive investment strategy is initially justified with the help of the theory on efficient markets. The report therefore provides evidence that indexing is still a vital aspect of investment strategy and is not influenced by efficient market theory. The report also provides a brief overview of how investors use indexing to minimize transaction costs by replicating the market index in their portfolio. Furthermore, the success of indexing in the US, UK and bond markets is highlighted with the help of data from past research on passive investment strategies. The next section of the report provides a brief introduction to behavioral finance and how psychological biases influence investor behavior and prices. It also provides its contrasting view to the Efficient Market Hypothesis (EMH) and analyzes the effects of mispricing on the average returns achieved by the investor. Passive Management Strategy Proponents of the efficient market hypothesis believe that active management is a largely wasted effort and does not cover expenses incurred due to stock mispricing (Barberis and Thaler, 2003). Therefore, they advocate a passive investment strategy that does not allow any attempts to beat the market. A passive strategy requires minimal input and instead relies on portfolio diversification to match the performance of the market index. Passive management is usually characterized by a buy-and-hold strategy because efficient market theory indicates that stock prices are at fair levels given all available information and it makes no sense to frequently buy a… paper medium. .....this fact is used by investors to plot winning strategies. Furthermore, the results of this study suggest that it is not necessary to know predictable patterns and market inefficiencies to implement profitable investment strategies. Taken together, these results suggest that investors are able to achieve higher returns and minimize transaction costs by adopting a market-mimicking indexing strategy. The second important finding is the contrasting vision of behavioral finance. Two decades ago, many financial economists supported the efficient market hypothesis because of the forces of arbitrage. Today we realize that this was indeed a very naive view and that the limits of arbitrage can lead to significant pricing errors. Therefore, through this research we understand that the absence of a profitable investment strategy does not imply the absence of mispricing.