Mutual Funds - Index Funds for High Returns and Low Fees

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 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

Index mutual funds are mutual funds that invest in a cross section of stocks and securities chosen in such a way as to attempt to match one of the popular stock indexes’ returns. There are mutual funds that attempt to match the Standard and Poors 500, for example, as well as other funds that try to match the return (up and down) of the Dow Jones Industrial Average, just to give a couple examples of index funds.

Some of the 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.

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.

And, active management requires that a fund manager be hired who is an expert in stock picking and trading. Such a manager, of course, requires a salary commensurate with the manager’s ability. Index funds, by contrast, require no active management. The stocks are chosen, often by a computer program, to match the return of the index with the least possible trading and virtually no discretion necessary on the part 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.

You can enjoy the benefit of lower fees to be paid to the mutual fund investment company and your investment performing along with the market index it tracks. If you are in the market for a new way to invest, consider index mutual funds.

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