Mutual Funds - Index Funds

Posted by M. L. Williams

April 18, 2008

by M. L. Williams

Billions and billions of dollars have found their way into mutual funds since they first became popular in the early 1970s, which makes them now one of the best-loved investment options.

A Popular Category of Mutual Fund - Index Funds

There are different kinds of mutual funds and index fund is one of the most useful types of mutual funds. This variety of fund is highly regarded and many people invest in it, all for good reasons.

Index Funds for Low Fees

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.

Index funds advantages

Index funds have several advantages, two of which I’ll discuss here. One is that the average expenses of index funds tend to be lower because index funds do not require 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.

If a manager is controlling decisions on buying and selling particular stocks to get a higher return, this is called active management. An actively managed fund has a large turnover of equities resulting in significant costs. A fund that is actively managed requires a manager adept at stock trading. An expert manager, therefore, would garner a salary that is equal to his or her experience and skills. On the other hand, Index funds do not need to be actively supervised. Simply matching the return of a particular index is the goal, and since a computer can do this, there is not much trading or involvement needed from fund managers.

Another advantage of index funds is related to previous one. If you choose an index fund, you can know that your fund will not be among majority of managed funds that regularly under perform the stock market as a whole.

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.

About the Author:

Learn all about index mutual funds and other investment and personal money matters issues at Mutual Fund Trader, a top source of information about the mutual fund category.

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