How To Invest in Index Funds

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An index fund is basically a type of mutual fund that mimics a stock index by buying the same stocks that a particular index covers. Most people are familiar with the S&P 500 Index, the Dow Jones Industrial Average Index or the Nasdaq Index.  The indexes themselves just show the daily movements of all the stocks that the index is made up of.  You cannot purchase the index directly so index funds were created to fill that void.  Now you can purchase an index fund which mimics the actual index it's modeled after.

  1. An index fund's return should very closely match the index on which it is based.  However, there may be small fluctuations.  After all, the index itself doesn't have any fees or trading costs.  The index fund does.  So there are often slight variations in returns.
  2. You can purchase an index fund basically anywhere you already do your investing.  Once you have done your research and know what index fund you want, you can check with your existing financial firm to see if it's available.  Firms need to have agreements with the mutual fund company in order to sell their funds.  Most firms try to have a wide variety of agreements already signed.  If you are interested in a fund that your firm doesn't already have an agreement with, your firm may try to see if they can get that agreement in place for you. 
  3. You can also purchase the index fund directly through the mutual fund company as well.  If you purchase directly through a fund company, you will most likely be limited to that particular fund company's funds.  So choose wisely if you go that route.
  4. Some firms have a dollar minimum in order to open an account.  If you have that amount already saved, that's great and you have more choices.  But many people want the option of contributing regularly in small amounts to start building an account up.  Finish Rich has a nice list of firms that have low opening minimums.  You can also us the mutual fund screener at Morningstar.  You can set your criteria and see a list of funds that meet your criteria. 

Regardless of where you go and how much you invest, it is important to remember that it is usually better to buy and hold rather than hop around.  Unfortunately, most people will buy something and if it goes down, will jump out and then lose the upside swing.  Most people don't make the annual returns listed for a fund because they don't stick it out.  That doesn't mean you never change to a different fund, but you should do it for better reasons than "just" because it went down.  The stock market fluctuates and you will need to ride out some of those ups and downs.


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