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Index funds offer stability, provide the benefits of diversity, and are easy to manage. For those interested in index funds, these investments are an excellent way to be involved in the stock market without too much complexity.
What is an Index Fund?
Index funds are a type of mutual fund. Mutual funds are an investment where purchasing one share of the mutual fund will buy into several shares of stock or bonds from several companies. Mutual funds are typically managed by someone or a group of people. These people choose what stocks or bonds should be in the fund that they manage.
Index funds are a little different in that they aren’t as actively managed. The fund purchases stocks and bonds based off of a specified index. The most popular and most used index is the S&P 500, which consists of stock from 500 of the biggest companies in the United States. Index funds that are based off the S&P 500 will buy the stock of these companies to mirror the S&P 500.
Index Funds Can Be Less Risky
Because index funds, like ones based on the S&P 500, are investing in hundreds of companies and in dozens of sectors, they typically can be less risky than other funds. If one company or sector has a bad year, the rest of the companies within the fund will help soften the blow. However, index funds are still stock, and still share the risk that comes with investing in stocks.
Low Fees Make the Index Fund a Great Buy
Index funds have some of the lowest fees out of any mutual fund. Because these funds need much less management, the fees for these funds are much less. A typical mutual fund fee could be 1% or more per year, whereas index funds fees could be less than 0.1%.
Inexperienced Investors Can Easily Enter the Market
For a first-time investor, it can be confusing to figure out how much money to invest and where to invest it. With an index fund, however, you simply put in as much money as you are comfortable risking and track the index on a regular basis. There is no need to obsessively watch the news or track the market looking for the next great opportunity. Generally, the S&P 500 will grow at a rate of 6-10+ percent per year over a 10-year or longer period regardless of how good or bad the economy is in the short-term.
Index funds can be a great investment for anyone wanting to manage his or her investment easily. Index funds provide diversification within one investment. This makes it easy to track your portfolio and gain a solid understanding of where it is going. Whether you are an aggressive investor or someone who wants to play it safe, there is an index fund available suitable for your needs. Of course, the best course of action is meeting with a trusted Registered Representative to learn what is best for your unique situation.