Mutual Funds - Index Funds for Low Expenses and High Returns | Mutual Funds

By M.L.Williams
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Mutual funds have been around for a long time - since the early 1970's they have increased in popularity with each year - billions and billions of dollars are now invested in mutual funds, making them one the most popular investment vehicles.

A Popular Type of Mutual Fund - Index Funds

There are several different kinds of mutual funds, but a good one to consider is index funds. Index funds are a very common investment because of their usefulness.

Index funds

Index mutual funds are a kind of mutual funds that select a wide variety of stocks and securities with the goal of matching the returns of a well-known stock market index. Some mutual funds are intended to match the Standard and Poors 500, while others are to match the return, which is the up and down of the Dow Jones Industrial Average.

Some of the index funds advantages

Index funds have several advantages, two of which I'll discuss here. One is that the average expenses of index funds tend to be lower because index funds do not require active management.

Active management is when the fund has a fund manager who chooses what to buy and sell to maximize the return of the fund. Active management usually entails frequent buying and selling, incurring costs associated with such transactions.

If a manager is controlling decisions on buying and selling particular stocks to get a higher return, this is called active management. An actively managed fund has a large turnover of equities resulting in significant costs. A fund that is actively managed requires a manager adept at stock trading. An expert manager, therefore, would garner a salary that is equal to his or her experience and skills. On the other hand, Index funds do not need to be actively supervised. Simply matching the return of a particular index is the goal, and since a computer can do this, there is not much trading or involvement needed from fund managers.

A second advantage to index funds is tied to the first. Since more than half of the universe of managed funds under perform the broad market indexes, when you choose an index fund, you can be assured that your fund will not be in that under performing group.

That way, you pay the company less in fees, and your investment normally does about as well as the stock market index it is tied to. When looking for your next investment opportunity, you should consider index mutual funds.

About the Author

Learn all about index mutual funds and other investment and personal money matters issues at Mutual Fund Trader, a leading source of information covering the mutual fund industry.

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