Mutual Funds - Index Funds for High Returns and Low Fees

By M. L. Williams in Mutual Funds on April 20th, 2008

-->

by M. L. Williams

Since the 1970s mutual funds have been getting more and more popular, and investors like them so much that they have put several billions of dollars into this kind of investment.

A Popular Option As A Mutual Fund - Index Funds

There are different kinds of mutual funds and index fund is one of the most useful types of mutual funds. This variety of fund is highly regarded and many people invest in it, all for good reasons.

Index Funds for Low Fees

One type of mutual funds is index mutual funds, which are used as a way to invest in a cross section of stocks and securities. This is in attempt to meet the most favorable stock indexes’ returns. As a couple examples, there are mutual funds that look to match the gains and losses of the Standard and Poors 500 as well as other funds that look to do the same with the Dow Jones Industrial Average.

Index funds advantages

There are several advantages to owning index funds, and I’ll elaborate about two of them here. The first advantage of index funds is that the average expenses are comparatively lower since they do not need active management.

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.

And, active management requires that a fund manager be hired who is an expert in stock picking and trading. Such a manager, of course, requires a salary commensurate with the manager’s ability. Index funds, by contrast, require no active management. The stocks are chosen, often by a computer program, to match the return of the index with the least possible trading and virtually no discretion necessary on the part of the fund’s management.

The second good reason for selecting index funds is similar to the first. Choosing an index fund means your returns will track a market index, which means that your fund will be generating a higher return than the over 50% of funds that do worse than those indexes.

You can enjoy the benefit of lower fees to be paid to the mutual fund investment company and your investment performing along with the market index it tracks. If you are in the market for a new way to invest, consider index mutual funds.

About the Author:

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