Index funds, what are they?

Index funds, as you may already have heard, is an investment instrument that goes by another name - mutual funds. These investment instruments are not new, but it was not until the 1990s that they took off as mainstream investment vehicles. These capital pools made it possible for people to participate in the stock market without large amounts of money to invest.

Index fundsThey differ from standard stock investments in that the investor is not buying the individual stock shares themselves. Instead, multiple investors buy shares in a special mutual fund company that pools the capital to buy the stocks, money market instruments and bonds that are included in the pool.

Often, the stocks selected are representative stocks from one index, such as S & P 500. This is the reason they are also referred to as index funds.

Index funds and mutual funds characterization 

These are two basic types, passively managed which are one type characterized by the selection of stocks being solid but slower growing stocks that need little management. This type of fund usually has lower fees associated with it. Actively managed are a more aggressive type of mutual funds meant to grow more quickly and need more management so stocks that stop performing well can be sold and replaced with better-performing stocks.  The investor can choose one or the other or both. It just depends on the ultimate goal of the investments.

Because of some clear advantages that index funds have, 88 percent of all investors hold mutual fund investments regardless of any other investments they might make. One of the biggest advantages is that the selection of investment vehicles is diversified. This is highly desirable as it reduces risk but more expensive to do when buying stocks individually yourself. The variety of choices is another advantage. If you have looked at a list of them, this is easy to see. You can even choose a particular industry type.

Advantages and attractiveness 

Low investment minimums are among the biggest advantages. It is possible to begin with as little as $1000 to $2000 to buy into an index fund. Some of those capital pools have a no minimum initial investment on the condition that the investor makes a contribution of $50 to $100 per month to the fund. It is easy to see why mutual funds have become so popular. It is not unusual to find many companies offering mutual fund investments as part of their retirement benefits for employees.

Mutual funds also have lower transaction costs than other types of stock and security investments. This is largely due to brokerage commission being reduced since the broker is buying and selling large quantities of stocks, bonds, etc. at a time.

Investing in index funds is an attractive option. You can choose a fund that gains slower for long term investment with the lowest possible risk or one that grows faster and more aggressively for quicker profits but with risks a bit higher. Some invest in both, especially when they want to build retirement funds through investments that have lower risks than purchasing individual stocks. No investments can ever be said to have no risk, but mutual funds do offer an option for reduced risk investing.

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