An index fund is a type of mutual fund. The portfolio in an index fund is designed such that it matches or tracks a particular market index, say the S & P 100 or the Dow Jones Industrial Average. Investors desirous of trading in index funds can do so with a small amount of money. Index funds are made up of a number of stocks representing a market index. When you trade through index funds, you enjoy the flexibility of choosing sectoral stocks.

Offering a broad market exposure, index funds have low operating expenses and low portfolio turnover. These attributes make index funds popular among investors. They have performed better than some of the actively managed mutual funds. The S&P 500 is the most actively tracked index. Other indices tracked by the index funds include DJ Wilshire 5000, Barclays Capital Aggregate Bond Index, Russell 2000 and MSCI EAFE.

Index funds investing is a form of passive investment. They have a low expense ratio, making them ideal core holding in IRAs and 401(k) retirement accounts.

How to trade index funds?

Trading index funds are very simple. All that you need is an account. Then choose the index and start investing small amounts of money.

Opening an account

To trade index funds, you have to open an account with an online broker. If you’re a novice, you can enlist the services of an investment broker. If you’re looking for the cheapest option to trade index funds, an online broker is the best.

Choose the index

Index funds track the number of indices. As an investor, you make the choice whether to invest in bond index funds, stock index funds or commodity index funds. Choose the Best Index Funds to invest your money.
If stock index funds are your choice, the three major indices are S & P 500, Dow Jones industrial average (comprising of 30 blue chip companies) and Russell 2000 (small companies)

Benefits of index funds

Low risk coupled with steady growth

The USP of index funds is their low risk while guaranteeing long-term, steady growth of your investment portfolio. The portfolio is made up of diversified stocks and bonds, from different sectors contained in the index. This diversification is what cushions you against major losses.
As index funds are aligned to the market conditions, they’re able to deliver steady growth. In fact, in the past few years, index funds have performed better than large-cap actively managed funds.

Lower fees

Low fees are what draws investors to index funds. Being in the nature of passive investing, that follows the ups and downs in the index, index funds do not have the need to invest in a research and analytical team to study market behavior and realign the portfolio. To add-on, with the limited number of transactions in the fund, as compared to an actively traded non-index fund, the fees tend to be low. Low fees and low transaction costs are the reason why index funds have a low expense ratio.

Earn returns at market rate of return

Index funds are aligned to the market index. Hence, the portfolio is comprised of stocks and bonds that make up the index. However, the companies listed in the index perform, the index fund also follows the same pattern. So, there is no question of you making a loss. Your return from the index fund will be equal to the market return.

Tax advantage

Returns from your investment are subject to tax. Hence, the real rate of return on the investment is the market returns as reduced by the tax rate. On the other hand, index funds are tax efficient investments. The market tracking structure of the index funds ensures that your portfolio is tax efficient all through the year.

Top 5 index funds

If you’re looking to reap good returns with minimal risk and effort, index funds are what you should be looking for. Whether you’re an active or passive investor, index funds are vital in your portfolio of investments.

Watch out for the best performing index funds

• Vanguard Industrials ETF
• SPDR S&P Regional Banking ETF
• Vanguard FTSE All-World ex-US ETF
• Wisdom tree Smallcap Dividend ETF
• Schwab U.S Dividend Equity ETF

The popularity of index funds is at its peak. A large percentage of the population investing in mutual funds chooses to select an index fund. Index funds with their low risk, low fees, and assured market return are finding a steady stream of investors. If you’re a prudent investor who does not put all eggs in one basket, diversification is a secret, and what better investment route than an index fund.