An index fund is a type of mutual fund or exchanged-traded funds (ETFs) that are designed to imitate and track specific stock market indexes. Index funds have to match the returns of a particular benchmark index. Some of the best examples of indexes are S&P 500, the Dow Jones Industrial Average (DJIA), Russell 2000 Index, and MSCI EAFE Index.
It purchases the securities that form the entire index and automatically targets and matches the average market returns. It is not about beating the market but rather being the market itself. It is a passive income approach of investment where the fund manager does not need to spend more time and resources to analyze and decide where to invest in the stock market or to rebalance the portfolio. This does not need to avail the service of fund managers and only requires a lower management fee.
This kind of investment is usually for long-term and retirement purposes. Compared to a managed fund, index funds have lesser volatility when it comes to their potential gains and losses.
How to invest in index funds?
- Select an index that you are going to track. The most prominent indexes that investors track are S&P 500, DJIA, and Nasdaq Composite.
- Choose the suited fund for your index. This means that you have to decide what index fund performs well in tracking an index.
- Buy a share from your chosen index fund. You have to open an account with the mutual company that is offering an index fund.
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