There are many different types of funds to invest into, and some can be more complicated than others. Some have better benefits than others, and investing in index funds is no different. They have advantages such as being simple, having lower costs, diversification, and even some tax advantages.
To first understand the benefits of investing in index funds, you should first know what they are. Simply put, they are a group of stocks that represent a larger group of stocks. The larger groups of stocks can be small company stocks, high tech stocks, NASDAQ stocks, or an array of other options. Index funds are passively managed, low costing mutual funds that mimic the performance of the markets they represent.
The first benefit to investing in these kinds of funds is that they are relatively simple. The guesswork is taken out of investing, in that if you want to invest in small cap company stocks, all you do is buy the shares that mimic the small cap company stocks. The same would go if you wanted to invest in large cap or high tech companies. Instead of buying individual stocks in a certain market, you are buying all of the index funds under that market. Your investment will do as well as the overall performance of that market. You can easily open an account online and start with a low minimum opening balance.
The seconds benefit to investing in index funds is the lower costs. Index funds will tend to have costs that are lower than other mutual funds, because they are simpler. Being simpler and less complicated means that there are less employees to pay. And that also means with no managers for you to pay, you save on their fees. So since the costs are lower, that means in turn, you will earn more.
The next benefit to investing in index funds is that they are more diverse. Being passively managed, these funds can typically hold more securities and offer an increased diversification. This will also lower your investment risk, because with more diverse stocks, some may wind up going down, but others may go up. While with having a less diverse investment, you have no up to counteract your going down.
Finally, investing in index funds comes with tax advantages. Since the portfolio turnover is rather small in an index fund, the capital gain potential that you have is less than would be in funds that are more actively managed. So you have a lower tax rate for the longer term capital gains. Whereas most mutual funds trade on a weekly, and sometimes even daily basis creating higher tax rates.
Investing in index funds is a simple, cost efficient, and diverse way to invest in stocks and create a return on that investment. Since they are long term, you can invest in them, and just leave them, instead of having to check on them daily. This makes it very easy for the beginner investor who doesn’t know anything about investing, without making you subscribe to any newsletters to learn more and know what your investments are doing on a daily basis.