What is an Index Fund?

There’s a lot of buzz around index funds being a low fee way to invest, yet according to a recent survey, not all investors understand what an index fund is, or how if differs from a traditional, managed mutual fund. Matt Allgeyer, Financial Planner with Wamhoff Financial Planning and Accounting Services, explains them to Elliot Weiler.

1. What is an Index Fund?

  • An index fund is typically a mutual fund, or group of investments, that try to replicate a specific index in the financial market, such as the DOW, S&P or Nasdaq.
  • An index fund is not a managed account. It will experience the ups and downs of the regular market.
  • Index funds are meant as a tool to mimic the actual market of that financial indicator.

2. Index Fund Pros:

  • It can be a cheap alternative to picking specific mutual funds, which may have higher management costs.
  • Having an index fund in your portfolio along with managed accounts can provide diversification.

3. Index Fund Cons and Things to Consider

  • Index Funds carry the same amount of risks as the actual market.
  • Don’t look solely at fees. Consider fees, your savings goals, and anticipated return to determine whether an investment is right for you. In other words, how does it fit into your overall retirement savings strategy?