2007-10-20 13:36:59 · 5 answers · asked by kevster1020 2 in Business & Finance ➔ Investing
Index funds are mutual funds that track a particular index in the stock market. This might be the Dow Jones index, the Standard and Poors 500, or others. They do this by buying just the stocks that the index uses, and in the same proportions.
There are 2 main advantages. First - most mutual funds don't perform as well as the indexes. The managers are seldom as efficient as the market as a whole. And very, VERY few mutual funds outperform the indexes on a consistent basis.
Secondly, index funds are very inexpensive. The only overhead is rebalancing the fund now and then if the index changes, and tracking the paperwork. Some index funds have expense ratios of .5%. That means for every $100 you put in, only 50 cents goes towards the operation of the index. In managed funds, that number can be 4 to 6 times as high.
So they're cheaper, and they tend to perform better. What's not to like?
2007-10-20 13:44:37 · answer #1 · answered by Ralfcoder 7 · 1⤊ 1⤋
Index funds are an easy way to have your investments follow the market. The fund is diversified into investments that by design track with a particular index. For example, if a fund tracks with the S&P500, It owns the correct combination of stock that if the S&P500 goes up 2%, your fund will also. Index funds typically have lower fees because stock selection is mathmatical, not intuition. Over periods of time, index funds have always done well. There are always some better and some worse. Index funds are a good place to be if you are sure you want to be in a particular group of funds.
2007-10-20 20:45:16 · answer #2 · answered by dawcr 3 · 0⤊ 1⤋
IMO.....Index funds are for people who are too lazy to do the research necessary to find funds that do outperform the index (even after expenses). They do exist.
For example if you go to the Vanguard web site you can find several low cost funds that have outperformed the S&P for the past 5 or 10 years....and that's just Vanguard.
2007-10-21 00:12:07 · answer #3 · answered by kevinjohnbrown 2 · 0⤊ 0⤋
they are made to follow the performance of a certain sector or sectors of the stock market and are therefore not biased by whoever is managing the fund. also, the expense ratios are usually relatively low when compared to other non-index type funds.
2007-10-20 20:45:18 · answer #4 · answered by Anonymous · 1⤊ 0⤋
Lower expenses (since you aren't paying a suit to "think", even though they know little more than you do) mean that more of each dollar you invest is working for you. When you compound the impact that has over the years, it's the path to wealth...
2007-10-20 20:41:34 · answer #5 · answered by Anonymous · 0⤊ 1⤋