Mutual Funds - Index Funds
Author: M.L.Williams Total views: 12 Word Count: 385
Mutual funds have been around for a long time - since the early 1970's they have increased in popularity with each year - billions and billions of dollars are now invested in mutual funds, making them one the most popular investment vehicles.
A Popular Category of Mutual Fund - Index Funds
There are several different kinds of mutual funds, but a good one to consider is index funds. Index funds are a very common investment because of their usefulness.
Index funds - Mutual Funds that Track Stock Indexes
Index mutual funds are a kind of mutual funds that select a wide variety of stocks and securities with the goal of matching the returns of a well-known stock market index. Some mutual funds are intended to match the Standard and Poors 500, while others are to match the return, which is the up and down of the Dow Jones Industrial Average.
Some of the index funds advantages
There are several advantages to owning index funds, and I'll elaborate about two of them here. The first advantage of index funds is that the average expenses are comparatively lower since they do not need active management.
Active management is when the fund has a fund manager who chooses what to buy and sell to maximize the return of the fund. Active management usually entails frequent buying and selling, incurring costs associated with such transactions.
An expert in picking stocks is necessary to actively manage a fund. An expert manager will command a salary equal to his capability. Conversely, index funds can be managed with the use of technology, placing few demands on management. A computer program is generally used to choose the stocks to match the return of the index, eliminating excess trading on behalf of the fund's management.
The second good reason for selecting index funds is similar to the first. Choosing an index fund means your returns will track a market index, which means that your fund will be generating a higher return than the over 50% of funds that do worse than those indexes.
So you get the advantage of lower overall fees charged by the mutual fund investment company, and the advantage of having your investment perform just about as well as the market index which it tracks. Next time you are shopping for an investment vehicle, give index mutual funds some thought.
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