Are Index Funds For You?

Are Index Funds For You?
by Takara Alexis

Index funds, are a type of mutual fund, and they are a pretty simple concept in the world of investments. In an index fund, stocks are grouped together from companies included within an index, for instance the S&P 500 or the Dow Jones Industrial Average. The percentage of stock is kept the same as the indexes themselves in an attempt to copy the index. While it's a rather basic concept, it's one that for many has proven to work over time.

The Dow Jones Industrial Average (DIJA) is a price weighted index of 30 of the largest, most widely held stocks traded on the New York Stock Exchange. The S&P 500 is an unmanaged group of securities considered to be representative of the stock market in general.

Whether or not you want to invest in an index fund depends on the type of investor you are. Each person has a distinct style and keep in mind that index funds are different from other mutual funds.

Most mutual funds are actively managed so a fund manager is constantly picking new or different stocks to go into the fund. This active attempt to beat the market is based mostly on timing and choosing the correct stocks and bonds. This could sometimes pay off. Other times it does not. Index funds, on the other hand, are a passive investment meaning they aren't actively managed.

But one of the most attractive parts of index funds comes from the lack of active management. Because they don't demand the same constant administration and attention as an actively managed mutual fund, their expense ratios are usually lower.

Some say if you can not beat a market, join it which is one of the biggest attributes of an index fund. The funds are great for people who wish to follow the market.

So are index funds for you? That relies on your investment style. You should check with a financial professional before investing, and make a decision if index funds fit in with your overall investment strategy. But in the end, index funds offer an alternative way to possibly increase your wealth and achieve your financial goals.