What is an Index Fund?
Wanted to write an article for all the people out there that are looking to get into investing. I know for most people investing can be a complicated and stressful endeavor. Investing in index funds has been considered by many analysts as one of the smartest investments you can make. Index funds are affordable, enable diversification, and tend to generate attractive returns over time. With this article, I hope to introduce you to one of the easiest and safest ways to invest, the Index Fund.
What is an Index Fund Anyways?
So, for all the newbies out there, I know you are asking what is an Index Fund?
An index fund is a type of mutual fund whose holdings match or track a particular market index. It’s probably the easiest most hands-off approach you could take to build a diversified portfolio earning solid returns.
The reasons for that are the index funds don’t try to beat the market, or earn higher returns compared with market averages. Instead, these funds try to be the market, they buy stocks of every firm listed on an index and mirror the performance of the index.
When you buy an index fund, you get a diversified selection of securities in one easy, low-cost investment. Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes, you can build a portfolio that matches your desired asset allocation. For example, you might put 60% of your money in stock index funds and 40% in bond index funds.
Index funds can help balance the risk in an investor’s portfolio, as market swings tend to be less volatile across an index compared with individual stocks.
They offer great dividend rates and are great investments for both beginners and experienced investors. Index Funds are both safer and provide a consistent growth year in and year out. Just to drive that home, the S&P 500 Index funds have seen a 10% growth year over year since 1954. How about that for growth!
Different Types of Index Funds
Index funds have gotten a lot more complex and varied since legendary investor Jack Bogle created the first index fund back in 1976. They still offer the best way for a typical (or beginner) investor to have a broad diversification across an asset class without having to spend very much on buying individual securities and avoid paying the high fees associated with actively managed mutual funds. But nowadays investors can utilize index funds to gain exposure to certain markets, sectors, or even investment styles.
Now to get into the different types of index funds. There are 10 different types of Index Funds. A Few to consider are Broad Markets, International, Market Capitalization, Term-based Bonds, Municipal Bonds, Earnings Based, Dividend focused, Sector, socially responsible, Leveraged Index Funds.
Ways to Invest in an Index Fund
Investing in Index Funds is as easy as opening a brokerage account (or Traditional IRA or Roth IRA) with your brokerage firm or a mutual fund company (which I do not recommend) like Fidelity Investment, Vanguard, E*Trade, Merrill Edge, etc. Your first step is to look at the index funds’ offerings and whether the funds have investment or account minimums.
If you do not plan to invest much money initially, prioritize funds that don’t have account minimums. Alternatively, you can get started with an ETF version of an index fund instead of a typical mutual fund. Mutual funds are more likely to have a high minimum investment, but the minimum purchase for an ETF is never more than the cost of one share.
Then, choose an index. The S&P 500 and the Dow Jones Industrial Average (DJIA) are two of the best-known indexes for U.S. stocks. The index funds that track them are good choices for beginning investors. But there are many more options. Look at how various index funds have performed historically. You should also check their expense ratios and compare them to other funds tracking the same or similar indexes.
Whether you’re new to investing or already experienced, an index fund is a great asset to add to your portfolio. It takes a little time to find the right index fund for you, but once you do, you can sit back and let your money grow. Remember the name of the game for investing is. Do your own research that’s the only way to learn and grow. I have other articles that go over the simplicity of investing be sure to check them out as well!
Check out the other investing articles!