Index Fund Basics

An index fund is a group of investments that’s aim is to mirror an existing index’s performance. It is usually made up of the same investments as the index it tracks. Some benchmarks include the S&P 500, Dow Jones Industrial Average, Nasdaq, Russell 2000 index, Wilshire 5000 Total Market Index, and MSCI EAFE index. In this article, we will go over the basics of index funds and how to purchase them.

How Do Index Funds Work and How Much Do They Cost

The goal of an index fund is not to beat the market. Rather their goal is to mirror the performance of the index they are attached to. An index fund can help to balance out your portfolio. They can prove to be less volatile when compared to the performance of individual stocks.

How much does maintenance of an index fund cost? They usually have fewer fees than actively managed funds. But they may be subject to an expense ratio. These are fees that are subtracted from shareholder returns. They are a percentage of your overall investment. You also can be subject to capital gains tax if you hold your funds outside of a tax advantaged account.

How to Invest in Index Funds

When deciding you want to invest in an index fund the first thing you will want to do is set a goal for your investments. An index fund is best suited for someone with a long-time horizon, like saving for retirement. You will then need to pick your funds. There are several factors to keep in mind while doing this. First is the size of the companies you want to invest in, this could be small, medium, or large. Second is the business sector the fund focuses on. This could be consumer goods, technology, or maybe even health related businesses. Next, you will want to consider what asset class(es) the index fund uses as their investments.

When you know what you want to buy, then you need to know where you need to buy them. This can either be directly from a mutual fund company or your broker. You will also need to choose which type of account you want to put your investment in. This can be a standard brokerage account, an IRA, or a Roth IRA. You will want to make your purchase either based on a dollar amount or a specific number of shares.

Diversify With an Index Fund

Using index funds can really help to diversify your portfolio. They come in wide varieties that you can use to work with your investment goals. Use an investment advisor to help you pick the best funds for your situation.

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