Tag: Index Funds

Index Funds have these last years become one of the most popular ways for American people to invest. 

And it is because index funds involve instant diversity and returns that typically beat actively managed accounts.

But there are couple of things to consider before going all in, in the index funds.

The first thing is a question you gotta ask yourself which is all about “Is the index fund doing its job?”. 

In this one your index fund should for the most part mirror the performance of the underlying index. 

This thing shows the  index fund’s returns during several time periods. And also it compares it with the performance of the benchmark index.

Don’t start to loosing your mind if you see that the returns aren’t the same. because those investment costs, affect results, as the taxes do. 

But the red flags comes if the fund’s performance lags the index by much more than the expense ratio.

And the second things and the last to keep in mind is the question of “Is the index fund you want too expensive?”. 

Here you invest in an exchange-traded fund that tracks the index. And instead of sort of having to buy the main-course mutual fund, you purchase just a slice of the fund.

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Here we will talk about 5 main things to consider, because buying a index fund is a huge deal as any other investment you will ever make no matter if you invest in stocks, real estate, funds or simply yourself.

Trading costs

In this one if the fees of transactions or commissions aren’t waived you might want to consider how much a broker or even a fund company / brand. And these brokers and companies / brands are charging you as an investor to buy or sell the index fund.

Fund selection

In this one you gotta ask yourself a simple question which is “Do you want to purchase index funds from various fund families?”. 

These big companies which sell index funds are sort of carrying some of their competitors’ funds, but the selection may be more limited than what’s available in a discount broker’s lineup.

Convenience. 

This third one is about finding a single provider who can accommodate all your needs.

Impact investing

In this one you also gotta ask yourself a question but this time it is “Want your investment to make a difference outside your portfolio?”. 

Some of these main index funds may track benchmarks which target companies with more women in leadership positions. or even in global companies in the clean energy universe or high environmental, social and governance ratings.

Commission-free options. 

And this last one also involves a question to also yourself and this time it is the question is “Do they offer no-transaction-fee mutual funds or commission-free ETFs?”. 

And this last point is an  important criterion we use to rate discount brokers.

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Believe it or not but index funds have some costs which people forget or don’t know about or forget about when they are buying index funds.

In this article we will talk about 4 main costs because if we would talk about every single cost which is liked to index funds we would be here for at least 2 hours. And I’m sure that you don’t have the time for that.

Investment minimum.

This first one is the minimum which is required to invest in a mutual fund. The mutual fund cab run very high as to a few thousand dollars.

And when you have crossed that, then the most most index funds allow you as an investor to add money in smaller increments.

Expense ratio. 

This second cost is all about the subtracted payment from each fund a shareholder’s returns as a percentage of their overall investment.

And to find the expense ratio is the mutual fund’s prospectus or simply when you a quote of a mutual fund on a financial site.

Account minimum. 

This third one, is sort of different than the investment minimum but they are kind of similar when you look at it from a beginner perspective. 

When thou a brokerage’s account may be minimum at $0,  this price doesn’t remove the investment minimum for a particular index fund.

Tax-cost ratio. 

This last one is an extra fee which is sort of owning the index fund which may trigger capital gains taxes. 

If they are held outside tax-advantaged accounts. Like IRA or 401(k). 

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Which index funds are the best? Which index funds should I invest in? 

There are a lots of questions and not so many good answers. There are many people claiming that they are the “experts” in the investing field but trust me, as someone who have been in the investing world I can tell you that 70% of these so called “experts” on the internet didn’t invest a cent in the market or read a page of a investing book.

And that’s why I offer you a step by step journey on how to find good index funds.

Step 1) Pick which index

For the most part every index fund tracks somehow different indexes. So its important to decide which index fund works best for you. 

Keep in mind that there are indexed which are composed of stocks and a lots of other assets which are chosen based on:

Location / Geography

These funds which are in this one, are focus on stocks which are trade on foreign exchanges or even on a combination of international exchanges.

Market opportunities

This one is about emerging markets and other nascent.

Company size and capitalisation.

Here the index funds which are sort of tracking small, medium-sized or large companies

Asset type.

Here are we talking about the funds which are tracking domestic and foreign bonds, commodities, cash etc

Business sector or industry.

And on this last one are we talking about funds which are focused on consumer goods, technology, health-related businesses and every other field and industry. 

Step 2) Select which index fund

After you have finished step 1 and decided which index you are most interested in then the time comes to choose which corresponding index fund to buy.

Most of the time it comes down to the cost. And if it is worth of buying or not. 

The low costs index are pretty cheap to run and manage. and it is because they are for the most part automated to follow the shifts in value in an index.

However it is important that you don’t assume that all index mutual funds are cheap.

Keep in mind that even that these indexes aren’t actively managed by a team of well-paid analysts, they as well as the rest have with them some administrative costs. 

And these costs are for the most part a subtracted from each fund shareholder’s returns as a percentage of their overall investment.

Step 3) Decide where to buy.

This is the last step and as important as the two once above this one. 

You as an investor, trader or whatever you choose to call yourself can buy index in two ways.

The first way is buying the index through a brokerage and the second way is buying the index through a mutual fund company.

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