Index Funds

What you need to know

In order to be financially secure, an individual must leave no stone unturned when looking for places to invest their money. Historically, one of the best places to invest your money is the stock market. Unfortunately, many people are unfamiliar with how the stock market works, or they are reluctant to take on an inordinate amount of risk. For these individuals, an index fund may be the answer.

An index fund it a type of mutual fund. Mutual funds are investments which pool money in a variety of equities, such as stock, bonds, or cash equivalents. The choice of which securities to invest in is made by a fund manager. An index fund is a little different from the typical mutual fund because the securities that make up the fund aren't chosen by the fund's manager. Instead, they mirror a particular index. For example, an S&P 500 index fund would include investments in the 500 companies which make up the index. Index funds may also mirror the Wilshire, Russell, NASDAQ, or any other index. You also have the option of selecting stock index funds or bond index funds.

Index funds have many characteristics that make them popular. Many index funds invest in hundreds of individual stocks. Since the companies are often in different sectors, it ensures that you will be diversified. In addition to diversification, index funds also tend to have a more competitive cost structure than typical mutual funds. The stocks or bonds that comprise the index fund mirror the given index, so there is no need for a fund manager to figure out which stock to add to the fund. All they need to do is look at the list of companies in the index. This keeps costs down and ensures that more of the profit is returned to you.

When you make the decision to begin investing with index funds, your goal is obviously to choose the best index funds. If you are currently working with a financial advisor, they can provide you with many options. If you prefer to handle things yourself, then you need to begin doing some research on your own. You might want to begin by identifying major indexes, studying their historical performance, and the mix of companies that comprise each index. Once you find such an index, you can do a search at a financial site for an index fund that mirrors your index of interest.

In sum, index mutual funds can be an integral part of a financial plan. They help keep your investment diversified, and have lower management fees than other types of mutual funds. They should be strongly considered by any prudent investor.

by Damien Baldino

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