Published on : 23 June 20204 min reading time
It is always interesting to invest your capital in order to generate profits. From this perspective, index funds make it relatively easy to invest, since they are based on the principle of tracking a stock market index. Unlike active mutual funds, index funds can generate returns over a long period of time without overspending and with significantly less risk. So how do you use index funds to manage your wealth?
What should be remembered about index funds?
An index fund is a type of mutual fund. It is an investment in a portfolio composed of several shares or bonds belonging to different companies, following the evolution of a market index. In other words, instead of investing in the shares of a single company, an investor will have the opportunity to diversify and own shares in an entire market. When buying an index fund, the diversified management of the invested money is entrusted to a group of people who operate in this type of fund.
The investor can determine whether an index fund is profitable or not by following the performance of the index. The tracking error must be taken into consideration. This is to determine the extent to which the returns of an index fund deviate from the benchmark index it tracks. The lower the tracking error, the better the fund performs.
ETFs (exchange traded funds) are the best-known type of index funds. They are also called trackers because their function is to monitor the behaviour of the indexes. ETFs are publicly traded funds and can be bought and sold just like shares. Another point in common with equities is that ETFs have their own ISIN stock symbol (ID number) and their price is calculated on a daily basis.
How to use index funds in your asset management?
The advantages of index funds:
Index funds represent very attractive advantages for investors. Their principle is to follow an index whose value increases over time, which can balance, and even minimize, the risks for an investor’s portfolio, unlike investing in individual shares. Index funds allow the purchase of an entire index, making them an easier way to invest and perform in an entire market.
ETFs are also an advantage in that they allow you to receive dividends on the values of the indices they track. The investor can thus choose to receive his dividend or reinvest it in an index. ETFs can be bought or sold at any time of the day with a reduced fee (only brokerage commissions are applied).
How to use index funds?
There are certain steps to follow when buying an index fund to ensure proper management of your assets. In this respect, an index fund may be purchased from an investment fund company or through a broker. The choice of the index is a very important step and depends above all on the investor’s objectives. To help you in this choice, the Site Company offers you all the necessary information.
In addition to known indices such as ETFs, it is possible to find other index funds that combine stocks or bonds chosen according to certain elements such as:
× Geography: These are index funds that focus on a specific geographic area.
× Sector of activity: there are index funds that focus on a specific activity or industry, such as technology or the health sector.
× The nature of the market: emerging or growing.
× The size of companies: index funds can track small companies as well as large ones. In this case, the clues are given a different name. They are appointed according to the size of the companies they follow. There are then small, medium and large capitalization indices.
It is still recommended to invest in a single broad stock market index.
Another point to consider is related to costs. Index funds are advantageous because their execution cost remains low. However, this is not a general rule. To do this, you must include in your investment the minimum required (this amount can reach thousands of euros) as well as the expense ratio. The ratio represents a percentage that will be deducted from the investment amount. From a tax point of view, owning index funds may involve paying taxes.