Indices help you track the movement of the market in an easy way. There’s a lot of profits to take from index investing too.
And perhaps the easiest way to invest in an index is to invest in index funds. Let’s get to know these funds and how you can make money off of them.
What’s an Index Fund?
Basically, an index fund is a mutual fund that aims to match or track the components of a market index.
Remember those popular US stock market indices? You can use index funds to invest in them.
Among the benefits of investing in an index fund are broad market exposure, low costs, and low portfolio turnover. Take note, too, that this is a passive index investing style.
Let’s dig into those advantages.
As we mentioned, this is a passive investing style. That means you don’t really need to “beat the market” and outperform it.
The main goal is to match the performance of the index. You simply buy and hold the securities of that index to match the broader market’s performance.
It lessens the chances of making risky market decisions. You also need not to overthink what would happen if you underperform the index with active management.
You can easily see your capital shrinking with all the costs and expenses you have to shoulder. With index investing, you can keep these costs at the minimum.
Since it’s a passive style, costs are low. Compare that to active management, where managers spend time and resources researching stocks and bonds to buy or sell.
With the cheaper costs and expenses, you can focus more on securing your positions and tracking the index’s movements.
As we mentioned, index investing allows you to gain exposure to broad market sectors. Portfolio diversification is a thing, and it’s a lifesaver.
When you diversify, you’re not putting all your bets on one item. You spread out the risks and try to maximize your profits from outperforming assets and minimize the risks.
Index funds let you capture returns from large segments of the market. These funds usually invest in thousands, if not hundreds, of holdings. That’s instant diversification for you.
Index funds and passive index investing styles tend to outperform active counterparts in the longer haul.
Since your goal is not to beat the market but to survive it, you usually focus on the longer term. This is a huge advantage for those with low risk tolerance and long-term goals.
Index Investing through Index Funds: Is it for You?
Even though index funds provide all these advantages, their active counterparts still have their own benefits to offer.
That is to say that index fund investing may not be for you if the strategy doesn’t sit well with your investing personality.
For instance, if you have high risk tolerance, mutual funds may be for you. That also holds true if you want to go for shorter-term results.
The key to deciding whether this is for you is to consider your overall investing style, goals, and time horizon. Nonetheless, index funds and index investing are very much popular for investors around the world.