Mutual funds have become one of the most popular investment choices that are available today. These financial vehicles allow an individual to place money into the stock market while at the same time reducing the amount of risk that will be incurred.
Additionally, these funds can be utilized for a variety of purposes. Some people choose this option as a means of saving money for a long-range goal, while other people are preparing for retirement. In many cases, the only drawback to mutual funds is trying to decide which one to use. For a lot of people, the solution to this dilemma can be found in the form of an index fund.
An index fund is tied to the performance of a stock market index, such as the S&P 500. These indexes attempt to gauge the performance of the market by tracking a certain number and variety of stocks. The results are generally used as a benchmark for the industry. It is the goal of most mutual funds to beat the major index performances. However, this is what sets the index funds apart. Their primary goal is to MATCH the level of the major indexes. On the surface, attempting to beat an index may sound like the preferable option; however, this is easier said than done. In reality, the vast majority of mutual funds in existence today fall short of the index levels. With this in mind, it makes much more sense to adopt the philosophy of, “if you can’t beat them, join them”. This is accomplished by choosing a particular index (i.e. the S&P 500) and creating a fund that mirrors the same stocks and percentages.
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Let’s take a look at the two main advantages of choosing an index fund:
Better results. Index funds bring a higher rate of returns than 80% of actively managed mutual funds. Lower fees. The fact that the fund’s portfolio is tied to an index creates less work in terms of maintenance. This is passed along in the form of lower fees. The bottom line is that individuals who are looking for a long term mutual fund option should seriously consider choosing an index fund. They offer the same basic advantages that have made traditional mutual funds so popular (passive investment, no need to buy and sell). Also, they perform better (on average) and cost less. This produces a winning combination that is hard to beat.