Mutual Funds – Index Funds

by M. L. Williams

Since the 1970s mutual funds have been getting more and more popular, and investors like them so much that they have put several billions of dollars into this kind of investment.

A Popular Type of Mutual Fund – Index Funds

Although mutual funds can be sorted into a number of different categories, one of the most useful types of mutual funds is the index fund. This type of fund is very popular and widely held and for good reason.

Index Funds for Low Fees

Index mutual funds are a kind of mutual funds that select a wide variety of stocks and securities with the goal of matching the returns of a well-known stock market index. Some mutual funds are intended to match the Standard and Poors 500, while others are to match the return, which is the up and down of the Dow Jones Industrial Average.

Some of the index funds advantages

Index funds have several advantages, two of which I’ll discuss here. One is that the average expenses of index funds tend to be lower because index funds do not require active management.

Active management is when the fund has a fund manager who chooses what to buy and sell to maximize the return of the fund. Active management usually entails frequent buying and selling, incurring costs associated with such transactions.

If a manager is controlling decisions on buying and selling particular stocks to get a higher return, this is called active management. An actively managed fund has a large turnover of equities resulting in significant costs. A fund that is actively managed requires a manager adept at stock trading. An expert manager, therefore, would garner a salary that is equal to his or her experience and skills. On the other hand, Index funds do not need to be actively supervised. Simply matching the return of a particular index is the goal, and since a computer can do this, there is not much trading or involvement needed from fund managers.

The second good reason for selecting index funds is similar to the first. Choosing an index fund means your returns will track a market index, which means that your fund will be generating a higher return than the over 50% of funds that do worse than those indexes.

That way, you pay the company less in fees, and your investment normally does about as well as the stock market index it is tied to. When looking for your next investment opportunity, you should consider index mutual funds.

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