Beginners guide to Index Funds

Are you planning to invest in Index Funds? Let me help you to understand Index Funds and how does this funds work.

Understanding Index Funds

Before we proceed towards understanding the Index Funds lets understand what stock market index means. Stock market index is the number referring to the group of stocks’ relative value.

With the change in the value of particular index’s stocks number of the stock market index too gets changed.

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Dow Jones and S&P 500 are two of the main stocks that are referenced widely. Different stocks together make the stock market index for every respective stock. Both of them helps to know the performance of the market as a whole.

How does the Index Funds Work?

Index Funds largely works like a mutual fund. Slight change in mutual funds and Index Funds is that mutual funds are managed by a manager that manage the position actively in the funds, whereas in Index Funds, decision making process is outsources to the ones that are engaged in developing of the index. This thing largely helps in saving the money of the investors as they don’t have to pay anything to the mutual funds manager for decision making. Adding up to your knowledge, Index Fund have the portfolio manager, they work to ensure that results are closer to the index, as close as possible. This could be done in a best way by selling and buying the assets as they leave or join the list of index.

Minimising the Fee

If you are looking forward to have the financial independence and to have an independent life after retirement, then Index Funds with low cost, allows you to do so. Due to the Index Funds’ low cost the fee is minimized. A portfolio could easily be build by you so that you can mimic the Index Fund by yourself. Trading fee here will be more expensive than buying a mutual fund that has the low expense ratio.

Benefits of the Index Funds

  • Index Funds can easily outperform the actively managed portfolios in the long term
  • Index Funds reduces the risk when market is in turbulence
  • In case one of your stock is not performing well, then you could easily make up the loss by another bond or stocks
  • You are not going to outperform dramatically with the Index Funds but be sure that you are not either going to underperform drastically
  • To invest in Index Funds, you don’t have to be a master at investing
  • You don’t have good knowledge of economics and investing, or you do not have enough time to conduct a significant research on how to make your investment profitable, then let me tell you that Index Funds are the best option to go with
  • Index Funds allow you to keep your money, more of it, with yourself due to following reasons:
    • There is no sales commission, not even a small amount. While purchasing mutual funds that are actively managed, sales commission of upto 4-6% is paid to brokerage firm. But the case is completely different in Index Funds, as particular stock market index is tracked by them, so you don’t have to pay for any kind of expertise, hence no sales commission is paid
    • Index Funds have the low operating costs and they are efficient too

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