16 Aug 2023
Index funds offer investors a simple, low cost way to invest in a range of assets and markets. If you're looking for an index fund, find out about the different types of funds and which might be more suitable for you.
An index fund is an investment that tracks a market index (eg S&P 500). They aim to track the performance of the index and deliver the same return. So if the index rises by 5% in a year, your investment is also likely to return 5%.
Index funds are a way of investing passively – they aren’t actively managed. But this isn’t necessarily a bad thing. In fact, they tend to perform more consistently than actively managed funds. That’s because index funds help spread your risk by investing in a broader range of assets.
In short, yes. Because this type of fund invests in all the assets – stocks or bonds – of an index, you can get exposure to a much wider range of companies, securities and regions than if they were selecting single stocks.
And because they have lower management fees than actively managed funds, index funds offer a good value way to diversify within a particular asset class or market.
Like index funds, exchange traded funds, or ETFs offer a low cost, diversified mix of investments. However, where ETFs can be traded throughout the day like stocks, index funds are bought and sold only for the price set at the end of the trading day. While ETFs may offer lower expense ratios and greater flexibility, index funds simplify a lot of the trading decisions an investor has to make.
For investors with a longer-term investment plan or with a higher risk tolerance, it makes sense to invest in equity-heavy funds as you'll have time to recoup any drops in value.
In contrast, for investors with a relatively low risk tolerance, adding bond index funds can help mitigate against volatility.
Index funds offer a range of benefits, including:
an easy to understand approach
lower management fees
more consistent performance
a highly diversified portfolio
an easy way to get broad exposure within a particular market
Index funds are central to a balanced portfolio, especially if you want to invest in a particular sector or market, but don’t feel confident picking specific stocks. This video can help you learn more about index funds.
It’s also worth considering an actively managed fund in addition to investing in index funds – a comprehensive portfolio will have both.
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