There are many ways in which you can invest in the stock market, and index fund being a great option, but what is an index fund?
Index funds are mutual funds which take a computerized approach to trading on a chosen index. These funds are recommended by many savvy investors as being the perfect place for new investors to get started, and they offer a wide range of benefits to new and experienced investors alike. You may be wondering what are index funds and so here we caught up with financial expert Bharat Bhise to be able to give you a brief breakdown of this investment vehicle.
What is an Index fund?
Simply put an index fund is a an investment strategy whereby money is pooled together and then invested into a certain group of stocks (index) on the stock exchange, S&P 500 for example. Instead of an investment manager deciding on where to invest the money, an algorithm does this automatically in line with how the market moves.
How Do Index Funds Work?
Index funds are actually very simple in how they operate, algorithms are designed to buy and sell based on the actual performance of the market, rather than trying to beat the market.
Index Funds vs Actively Managed Funds
Both index funds and actively managed funds are considered as mutual funds, although this name is usually applied to an actively managed fund. The evidence over the last 20 years alone suggests that actively managed funds, or humanly managed funds, are outperformed by index funds. A big key here beyond the success of the fund is the cost of commission which investors must pay, often between 4% and 6% with mutual funds but with index funds those fees can be as low as zero.
Charles Schwab, Vanguard and Fidelity are some of the best brokers for index funds that you can find.
Best Index Funds For 2019
Currently the best performing index funds of 2019 are iShares Core S&P 500, SPDR S&P 500 ETF Trust and the Fidelity ZERO Large Cap Index. These are great index funds to choose and it isn’t too late to invest.
Can You Lose Money?
Just like any investment, there is always a chance you can lose your investment. However the range of diversity in your index fund investments ensures that this is highly unlikely.
What is the Rate of Return?
Rates of return of course vary depending on which fund you have invested into but they generally come in at between 8% and 12%, a solid average return.
How to Get Started
If you like the sound of this then you need to know how to invest in index funds.
- Pick Your Broker
- Select Which Index Fund Suit Your Budget
- Check What the Minimum Investment Is
- Review Additional Costs
- Invest When Happy
Final Things to Keep In Mind
- Keep your eyes open for better performing funds
- Ensure the index fund is doing its job versus market performance
- Monitor your returns versus those of investors in other funds
Now you now what is an index fund and how to go about investing in it, here’s to making money.