What are Index Funds? An index fund is an exchange-traded fund or mutual fund intended to follow specific predetermined rules in order for the fund to track a specified index, usually the stock index.
The most common types of index funds are those that are either actively managed by an experienced investor or those that are purchased directly from a company. Most index funds are traded on major exchanges such as the New York Stock Exchange and the NASDAQ. The rules that govern each type of index fund are different, so it is important to know which type will be right for you.
Active Managed Index Funds: These types of index funds are managed by an experienced investor that meets the investment objectives. This type of fund often invests only in stocks and bonds with a predetermined depth of specialization.
Many investors choose this type of investing because it is less likely to hit the bad side of the market. They also prefer this kind of fund because the manager is paid only if the investment performs.
fidelity-managed funds: Index funds that are administered by a firm that pays the manager with a percentage of the total value of the portfolio (known as the premium) instead of paying the investor with a dividend. The fidelity manager makes money when the market value of the stock or bond declines but loses money when the value goes up.
Because the managers make money at the expense of investors, they tend to be less liquid and are not as easily influenced by short-term trends. This type of fund also tends to be more expensive than actively managed funds.
Low-Cost Mutual Funds: Most index funds today come from firms with low costs of ownership. In general, the more shares the manager issues, the lower his or her cost of ownership. There are many index funds available that require no minimum investment minimum. You can invest in them for as little as $100 and get a good rate of return if you know where to look.
Index Volatility: Index funds allow investors to buy and sell securities on a regular basis. If an investor buys a stock or bonds, he or she can do so with a few clicks of the mouse, compared to actively trading with a broker.
The advantage is that there is no cost for buying and selling, which means more money in your pocket. Volatility can be a good thing, though, because it means that changes in the price of stocks and bonds can have a significant effect.
In general, index funds are considered a low-risk option for investors who don’t want to take on significant amounts of risk, yet are able to achieve high rates of return. Investors also should consider whether or not they need to have a degree of risk tolerance when choosing an index fund.
A high return level is not necessary to achieve success, since the returns can also be offset by high fees. If you are able to offset these costs with high-profit margins, then you are sure to have a winning combination.
ABOUT THE AUTHOR: Shank Dian