Many investors own stock via index fund while many aren’t aware of the term. This article is tailor-made for the latter group. So, if you have your money already invested in index funds. There wouldn’t probably be anything new for you in this article.
For starters, let’s begin with basics. The index fund is a kind of mutual fund that provides an opportunity to trace the profits earned on market index. An index is nothing but a bunch of securities usually representing a specific segment like the bond market or the stock market. Examples of companies that produce such indexes are Dow Jones and Standard & Poors.
This kind of fund will invest your money in the segment as a whole in the proportion of securities it holds. You can structure an index fund as an Exchange Traded Fund, a unit trust investment, or a mutual fund. Some of the popular companies that offer index funds are T. Rowe Price, Fidelity, and Vanguard.
It can be effectively said that an index fund is managed as the fund manager just replicates the index and not manage it act like that in equities.
All funds are different
If you want to buy an index fund, you have a vast variety to choose from. Some indexes offer funds that include almost every stock traded in the US stock market like the Wilshire 5000 Index. Some funds include stocks of other countries like the MSCI Brazil Index. Few indexes may be a division of a single huge index. For instance, there are many index funds offered by Standard & Poor’s that are nothing but pieces of S&P 1500 Composite index.
Citigroup Value Index in S&P 1500 includes few very large stocks that are known as value stocks, while Citigroup growth Index in S&P SmallCap 600 comprises of few small stocks known as growth stocks.
Lately, many other indexes have been introducing to offer variety to the investors. People can now invest in foreign currencies, stocks, commodities, and socially responsible organizations through index funds.
A fee to buy index funds is quite similar to that of mutual funds. It depends on the service level, accuracy, and specialization provided by the company.
Many people get confusing about the difference between ‘indexes’ and ‘indices’. Dow Jones refers to it as indexes, whereas Standard and Poor’s calls it indices. There is, however, no difference between the two except spelling and pronunciation.