How to Invest in Index Funds

An index fund can be described as a kind of mutual fund with holdings that track or match a certain market index. You can have a diversified portfolio and earn significant returns with this kind of investment. The reason is that index funds are not in competition with the market; they are, instead, trying to be the market.

That is, buying stocks of all the listed firms on the index and therefore reflecting the index’s performance. Index funds are helpful in balancing the risk in the portfolio of an investor. Market swings are usually less volatile throughout the index unlike with individual stocks. They allow you to buy the entire market indirectly.

With an index fund, you buy the securities making up the entire index. An index fund usually buys shares from all companies that are listed on an index. An investor then buys shares from that fund and its value will reflect the losses and gains of the index that is being tracked. You win by accepting defeat.

There is a high likelihood that you will not outperform the market when you pick individual stocks. Even experienced investors do not. According to research (2001 to 2016), over 90 percent of active fund managers actually underperformed their benchmark index. You have a better chance of meeting market gains than you have of beating the market. That is the major purpose of index funds.