Investing in Index Funds

An index fund is a mutual fund that is designed to track the components of a market index. As most investors know, the stock and bond markets have various indexes that serve as benchmarks regarding the performance of the overall market or of a specific sector within the market, like the Dow Jones Industrial Average (DJIA) or the Standard & Poor’s 500 (S&P 500). Index funds offer investors a way to own the underlying assets in the same proportion of the index to achieve a return that approximately equals the return of that index.

Why Invest in Index Funds?

For people who don’t have the time or patience for investment research, index funds offer a good diversified investment opportunity with limited risks and minimal fees. “Indexing” is a passive approach to fund management that has proven to provide better returns than actively managed funds. This lack of active management gives index funds a distinct advantage over more traditional mutual funds through lower fess and taxes.

Types of Index Funds

Practically every type of index has an index fund that is designed to mimics its performance. Some of the index fund choices include:

Dow Jones Industrial Average (DJIA): Possibly the most widely tracked index in the world, the DJIA is considered the gold standard of stock market indicators. Index funds that track the DJIA mimic the performance of the 30 stocks in this index.

Standard & Poor’s 500 Composite Stock Index (S&P 500): Another leading indicator of U.S. equities, S&P 500 stocks are chosen based on company stability and recognition.

Russell 2000: The Russell 2000 is a barometer of small-cap stocks, representing the performance of the 2000 smallest companies in the Russell 3000 index.

Wilshire 5000: This stock index actually consists of more than 5000 companies and represents practically all of the of the U.S. stock market.

Index Funds are not without Risk

It’s important to note that when investing in a stock index fund, you’re still investing in stocks, which always carries risk. As with any investment, you should always consider your own risk profile and timelines for investment.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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