An index fund is a collection of stocks from various companies. These stocks track investment indexes such as bond index, commodity index, and stock index. There are numerous stock indexes to choose from, ranging from tech stocks to oil stocks. They are ideal for long term investors because the stock market tends to trend upwards over time. Since index funds track the stock market (or a specific portion of the stock market, as the case may be), their value should increase over time right along with the market.
Historically, stocks have been the most lucrative investment over the long term, so you are unlikely to lose any money while investing in index funds if you plan to own them for 15-20 years or more. Like most investments, however, they can be very volatile over short periods of time. If used properly (i.e. bought and held for the long run), index funds can make asset allocation much easier since there is no style drift. With index funds, the most important statistic is the mutual fund expense ratio, since lower expenses equal higher returns with index funds. You should also consider the minimum investment per fund and how many to select. Low cost index funds can be determined by a number of factors such as expense ratio, load and commission.
What Makes A Low Cost Index Fund?
Expense Ratio – Each fund will need to have people who will maintain the paperwork and perform the actual selling and buying of stocks. This means there will always be a fee which the fund company will charge in order to maintain your fund. Usually any rate under 1% is considered low cost, but you should also compare it to other funds on the same index.No Load – Certain funds may require a back end or front end load, essentially a fee for selling or buying the fund. If there is a load or any other additional cost, it is usually not considered a low costing fund.
Not Transaction Commission – Always look at how you can sell and purchase these funds. If a fund is low costing, but has a high commission rate, it will not be classified as low costing. One good option is investing in Vanguard funds because they have very low expense ratios and some funds can be bought with no commissions.
Even a low cost index fund can still require high minimum investments, which can make it difficult to get started with funds investing. However, you can find online investment accounts that can be set up for a small fee. Other brokerages like Vanguard also have lower limits so you do not have to overextend yourself financially.
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