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Mutual Funds - Index Funds for Low Expenses and High Returns

Apr 26, 2008
Since the 1970s mutual funds have been getting more and more popular, and investors like them so much that they have put several billions of dollars into this kind of investment.

A Popular Option As A Mutual Fund - Index Funds

There are several different kinds of mutual funds, but a good one to consider is index funds. Index funds are a very common investment because of their usefulness.

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.

Index funds advantages

Two of the many advantages of index funds are featured below. For example, index funds typically have low management fees because they don't require much work for a manager, so you end up paying less.

Active management is when the fund has a fund manager who chooses what to buy and sell to maximize the return of the fund. Active management usually entails frequent buying and selling, incurring costs associated with such transactions.

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. On the other hand, Index funds do not need to be actively supervised. Simply matching the return of a particular index is the goal, and since a computer can do this, there is not much trading or involvement needed from fund managers.

Another advantage of index funds is related to previous one. If you choose an index fund, you can know that your fund will not be among majority of managed funds that regularly under perform the stock market as a whole.

That way, you pay the company less in fees, and your investment normally does about as well as the stock market index it is tied to. When looking for your next investment opportunity, you should consider index mutual funds.
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Discover all about indexed mutual funds and other investment and personal money matters issues at Mutual Fund Trader, a leading website covering the mutual fund industry.
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