AUS
NZ
UK
CA
USA
FRA
GER
ESP
ITA
NLD
PRT
SWE
GRC
IND
POL
BRA
ZAF
RUS
CHN
UAE
Summary
- Index funds seek to imitate the performance of a benchmark, by managing the same allocation and underlying securities, irrespective of the state of the markets.
- The major benefit of investing in index funds is that one gets an exposure to a particular set of firms at a low cost, which otherwise would have been expensive.
- Index funds are passively managed funds and thus have low fees.
Index funds refers to a fund which tracks a stock market index such as the ASX 200. These funds seek to imitate the performance of a benchmark, by managing the same allocation and underlying securities, irrespective of the state of the markets.
The major benefit of investing in index funds is that one gets an exposure to a particular set of firms at a low cost, which otherwise would have been expensive. The holdings in these funds are decided according to the underlying index. The investment manager has no role in that. The funds seek to replicate the returns of the index and not outperform it.
Index funds are passively managed funds. The fund manager invests in same securities as in the underlying index. Thus, the fees are generally lower than actively managed funds.
Source: © Rawpixelimages | Megapixl.com
How to invest in index funds?
- Conduct detailed research before you start investing in an index fund.
- In case of an exchange traded fund (ETF) index fund, investors can invest through an online broker.
- In case of an unlisted managed fund, investors can apply through a fund manager.
- You can invest in index funds via a fund manager, a full-service broker, or an online share trading platform.
- One of the easiest ways to invest in an index fund is through an ETF traded on the ASX.
READ MORE: How have the Big Four Banks performed year-to-date?
Key things to keep in mind while investing in an index fund
- It is important to track the reputation and historic record of a fund before going in with a buy.
- The average rate of return offered by the fund over the years. It makes little sense to invest in funds with low rate of returns.
- The location of the fund is critical since different taxation laws are applicable in different places.
READ MORE: 4 ASX-listed stocks with dividend yield over 5%
Fees of index funds
The fees of index funds are generally much lower than active funds. There are index funds that have fees of less than 0.20%, whereas active funds generally charge fees of more than 1%. The difference in fees can have substantial impact on the returns of the investors when compounded over long period. Lower fees are generally one of the topmost reasons for index funds to have become popular over the years.
Source: © Stbernardstudio | Megapixl.com
READ MORE: A glance at the top dividend stocks for the financial year 2022
Benefits of investing in index funds
- Index funds charge lower fees that actively manages funds. They also require less legwork.
- Indices have been historically seen to give better average returns than fund managers.
- Several ASX-listed ETFs are easily accessible on broking platforms.
- Index funds provide access to a range of companies from various sectors.
- These funds are also considered safer alternatives to direct stock market investing since they are less volatile.
READ MORE: Five exciting ASX-listed cannabis stocks for FY2022
The bottom line
Not all index funds have low fees. Therefore, it is essential for an investor to be aware of the index fund investing technique. Investors must ensure that they are truly investing in a low-cost product that tracks a benchmark and fits with their investing strategy. One must not forget that index funds are vulnerable to market swings, lack flexibility, and have limited gains.
