What is an Index Fund?
Index Fund is an investment product, which is a combination of different stocks, bonds or US or international assets and tracks specific indexes like S&P 500 or Dow Jones. A mutual fund is managed by a professional fund manager who is responsible for buying and selling stocks and asset allocation. Money is collected from all the investors and fund allocation is strategically developed to produce capitals gains and income from the investment. Due to the nature of the fund, it is available to all kinds of investor for a nominal fee.
Why you should invest in Index Funds?
Everyone should use Index fund as one of their investment strategies. I trade stocks and option but also have index fund in my investment portfolio. I love the simplicity and ease of investment. I’ll explain below why you should also invest in Index funds:
1. Simple and easy
The first and foremost reason to invest in Index fund is because we don’t have time and energy to learn all the investing principles. Yes, it does pay off for learning these techniques and being aware about the market. Investing is not everyone’s full time job. People have priorities. They need to earn through other means so they can invest.
Investing in Index fund is dumb simple and easy. All you have to do it choose an investment platform, select couple of Index funds to invest and send money regularly (Monthly or biweekly) that will be invested automatically. I use Fidelity platform for this purpose. Fidelity has some really good Index funds that you can start investing money right away. Fidelity 500 Index fund (FXAIX), Fidelity total market index fund (FSKAX), Fidelity select software & IT services (FSCSX) are the three of the good Index funds where I’ve invested my money.
2. Diversification
If you’ve done some research on stock market investing, you’ll come across this word a lot – diversification. Diversification refers to diversifying the investing without putting all the egg in same basket. The main concept of diversification is to reduce risk by investing in different investment categories. While it is still argued that diversification is not a good concept for maximum gain, it is logical for novice investor.
If you’ve done some research on stock market investing, you’ll come across this word a lot – diversification. Diversification refers to diversifying the investing without putting all the egg in same basket. The main concept of diversification is to reduce risk by investing in different investment categories. While it is still argued that diversification is not a good concept for maximum gain, it is logical for novice investor.
Index funds take this out of the equation. The funds within Index funds are spread amount different basket of stocks therefore diversification is already built in. Instead of heavily investing in one type of stock, Index fund manager allocates assets into different stocks to reduce risk due to market swing in any individual stock (or stock category).
How to choose which Index Funds to invest?
While researching Index funds, the two most important things that you’d want to consider is expense ratio and track record. Expense ratio tells you how much money you will spend in fees and track record means that past performance of the fund. As long as the fund has low expense ratio (lower than 0.2% as suggested by Rose Han in her YouTube channel), and good past performance, you cannot go wrong with index fund Index fund.
How do I start investing in Index Funds?
The best way to start investing in index fund is open an account with trading platform. For example, if you want to buy Fidelity index funds, you should open an account with Fidelity. This will ensure that you do not have to pay any transaction fee. You do not pay any transaction fee for the funds within Fidelity.
Next, you’d want to find the funds with good track record. The funds yearly rate of return and all-time return will show how the fund has been performing over the year and year to date. I always want to see an average rate of return of 8 percent and higher.
You can investigate other information like overall rating, risk of this category, performance and rick etc. but I do not pay very much attention to those before I’m more aggressive investor for my age. I’d probably get more conservation by the time I reach towards my retirement or financial independence
Do you use index fund in your portfolio? Please send your index fund picks that has made you money over a year. We’d love to hear from all of you!
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