Index mutual funds are an easy, affordable, and diversified option of investing in the stock market. When you buy an index fund as an investor, you get a variety of stocks in a single package-without having to go through the trouble of buying each one individually. The management fee is fairly low because the funds contain all investments in a specific index. You, therefore, end up getting higher investment returns.
Buying an Index Fund
You can buy an index fund from a brokerage or a mutual fund company. The same applies for ETFs (exchange-traded funds).
When deciding where to buy, consider the following:
Fund selection: do you prefer to buy index funds from different fund families? Major mutual fund companies hold their competitor’s funds. However, the selection is likely to be limited compared to what you will get from a discount broker’s line up. Convenience: look for a single provider who will cater for all your needs.
For instance, if you are only interested in mutual funds, a mutual fund company will do just fine as your investment hub. However, for screening tools and sophisticated stock research, you may need to go to a discount broker. Commission-free options: see if they offer commission-free ETFs or mutual funds with no transaction fee. Trading costs: check how much a fund company or broker charges to sell and buy the index fund if there is no waiver for the transaction fee or commission.
Index mutual funds usually track various indexes. One of the most popular indexes is the Standard and Poor’s 500 index. It tracks some of the largest and well-known businesses in the U.S and represents a wide range of industries. There are other indexes, like the S&P 500, made of other assets such as stocks chosen based on:
- Company size and capitalization
- Business industry or sector
- Asset type
- Market opportunities
Despite the wide range of options available, you will probably need to invest in one only.
Index funds are known for their low costs. Since they are automated, they do not require a lot of money to run. However, they still have administrative costs which…