What Is An Index Fund

Before you put your money into the company-sponsored mutual fund, consider index investing. What is an index fund and why should you include it in your investment portfolio? An index fund is an investment that relies on computer models and some human factoring to determine the components of a market.

The low cost, diversity, simplicity and long-term performance of index funds make them attractive to first time investors and experts alike. The investment is usually in securities comprising of stocks and bonds of companies that choose to be included in the particular index. In other words, an investor chooses to purchase into all or most of the companies included in one index. Some examples of market indexes are the S&P 500 Composite Stock Price Index and the Wilshire 5000 Total Market Index.

Index funds are generally easy to invest in, and there is no research that needs done on individual companies as in mutual funds. There is also less to manage and track with index investing, saving the investor time and money. Index fund fees are generally lower than managed funds because there is less time spent in making individual investment decisions.

Another advantage about index funds is that they are considered less risky than investing in individual stocks. That's because investing in funds gives returns based on the average of all the companies in the index. While there might not be the spectacular gains that a runaway winning company might yield, there is significantly less risk for staggering losses as well. Interestingly, index funds often perform better than managed funds and therefore make good investments that often continue to yield high returns. In the long run, the markets generally rise, and therefore so do index funds.

Index funds are less beneficial to investors seeking to get large gains over a short-term period. Index funds are best for a gradual increase over the long term. Also, many investors would rather do the research on individual companies and put their money into select companies in a more personal way. Index funds reflect a way of investing that can be described as buy and hold, that is, the investor buys in and then sits as the value rises steadily. Also with index funds, the investor is not able to invest in a certain segment of the economy that research shows may grow quickly, such as pharmaceuticals or biotechnology.

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Investing in index funds gives you the opportunity to capitalize on the success of the stock market at large, instead of mutual funds that may be concentrated on a specific sector.

The best index funds provide a relatively stable, secure way to invest in market performance itself. While it may seem that all index funds are alike, since they're based on the same underlying indices, that isn't necessarily accurate. The best index funds offer low fees, transparent structures and reasonable construction.

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At heart, index mutual funds and ETFs aren't such different investments. Both rely on the performance of a collection of stocks to provide big returns for clients. That's where the similarities end, though; index mutual funds and ETFs trade differently and provide varying options for index investing.

The best index funds provide a relatively stable, secure way to invest in market performance itself. While it may seem that all index funds are alike, since they're based on the same underlying indices, that isn't necessarily accurate. The best index funds offer low fees, transparent structures and reasonable construction.

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