Personal Finance Guide

With most mutual funds managers underperforming the stock market benchmark such as the S&P 500, added to the fact that most of them carry mutual funds expenses, it is easy to see why investing in Index Funds is attractive.

Index Funds hold all or a representative sample of the stocks or bonds in a particular market benchmark. The expenses of Index Funds are also very very low, especially when compared to mutual funds. An index fund aims to match the performance of the market. It does not try to beat the performance of the market.

Considering that most mutual funds underperform the market in the long run, aiming for the average of the market return does not sound so bad. You would at least beat 60% -70% of all mutual funds out there most years and over the long run.

Tax advantage

Since Index Funds don’t trade as often as mutual funds do, you will incur less capital gains tax. This does not apply to you if you are investing in a tax-qualified accounts such as a traditional IRA. You will not incur any taxes on your gains until you sell your investments.

Which Index Funds to invest in?

There are index finds that specialize in all sorts of stocks and bonds. There are Index Funds for small cap stocks, mid cap stocks, large cap stocks, international stocks, long term bonds, technology only stocks, to name a few.

It is most important when investing in Index Funds to bear in mind that the lesser the fees of the Index Funds the closer the performance will be to the market. For example, check out the Vanguard Index 500 fund for expenses and read its prospectus.

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