What are the benefits of index funds?
Investing in a balanced but diverse portfolio is one of the investment basics, with investing in index funds allowing this diversification across large parts of the market. Here we consider some of the benefits of index funds.
Long-term investment solution
Investing in index funds is a good way of investing for the long term. Index tracking mutual funds follow the highs and lows of the markets. These funds follow the tenet that over decades, the major indexes – on the whole – provide a return on investment for those people who have remained invested in the fund.
Cost of investment
Actively managed funds tend to have high management fees and may attract transaction fees for buying and selling a particular stock. Index funds do not require this level of activity; therefore, the management costs are historically much lower.
Commitment to investment
If you are investing for the long term, perhaps thinking ahead to your retirement, the chances are that your investment strategy is to make the most of compounding interest to grow your initial investment over a number of years. An index fund will give you the security that the investment will not underperform the benchmark.
If you invest in an actively managed fund, it is a fact that it will underperform at some time. With an index fund, the performance – or underperformance – is not an issue. This removes the temptation to want to sell in times of underperformance, which you could be tempted to do if you invest in an actively managed fund.
Between 1922 and 2011, the S&P 500 index was shown to have outperformed many actively managed funds.
Following the stock market and knowing where to invest your money can be a daunting task if this is not something you do every day. It is prudent to consult a financial adviser with access to up-to-date back office systems for IFAs, such as those provided by https://www.intelliflo.com/. It is also sensible to have completed your own research before talking to your financial adviser.
Many retirement bank accounts permit automatic investment in index funds without the need to consult a financial adviser. This makes managing money you want to invest easy, especially if you wish to top up your investment on a regular basis.