How to Choose an Index Fund

Index funds are one of the better solutions for investors who are willing to wait for long term growth, but don’t want to pay constant attention to the individual nuances of their portfolio. Index funds have several advantages over actively managed funds, including lower fees. The investor in an index fund can see capital growth as well as income from dividends – much like owning regular shares of stock. This article will serve as an introduction to choosing an index fund.

There are some basic tools you are going to need when picking an index fund. First – get yourself and internet connect. If you’re reading this, you’ve likely taken care of that. Some knowledge of investing, such as knowing what stocks, bonds, and mutual funds ever are, is a good idea. You’re also going to need an account at a mutual fund company, such as Vanguard or Fidelity.

There are hundreds of these companies – use the internet to research them. Of course, you’re going to need money. Owning an index fund is a good way to diversify your investments, without taking the risk that an active fund manager will make bad decisions which could cost you your hard earned cash.

An index fund attempts to duplicate movements of an index of a certain financial market. Index funds are passively managed mutual funds which buy stocks and hold them in a portfolio. One of the most common indexes is the S&P500. This Standard and Poor’s 500 index consists of five hundred companies that are meant to be a general representation of the stock market. One of the more famous indexed mutual funds is the Vanguard S&P500 fund, which attempts to invest in all of the companies represented in this index.

When deciding which index fund is best for you, you first decide how much risk you are willing to take. Smaller companies can be riskier compared to larger companies. But, as is the case with stocks, greater risk carries greater potential returns. There are indexes that follow large companies, small companies, and everything in between. There is even an index that tracks the movement of the entire stock market.

Take the time to do some research before you make a move or buy anything. Listen to what the best investors have to say and read their advice. Join financial clubs on the internet, forums are an excellent way to get first hand information. There is so much information and it’s so easily obtainable on the internet that there is no excuse for not knowing what you are doing. Print magazines, such as Money, can be a great source of information about specific funds as well.
All of this is going to help teach you how to choose an index fund that is right for you. Buy your shares slowly; everyone makes some mistakes in the beginning. This is how we all learn. If you want to take some risks and can afford to, that’s fine – but avoid having a completely high risk portfolio. As a beginner stick with name brands. My personal favorites are Vanguard and Fidelity. These companies both have long histories of running index funds very well.

Another great website for information regarding index mutual funds (and actively managed funds) is They give a lot of information and advice along with articles that analyze the mutual fund industry.
There are lots of index mutual funds available for just about every type of investor. Choosing an index fund is a very personal experience and depends a lot on what type of investment you’re trying to make. A little research on the fund you are planning to invest in can go a long way to making your foray in to the world of mutual funds a happy one.