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Last updated Sep. 4, 2022 by Benedict Osas

Investing in index funds is an easy way to start an investment. Even Warren Buffett, one of the world’s most successful and respectable investors, recommends low-cost index funds as the smartest investment one can make.

Index funds are mutual funds whose portfolio is similar to a specific index and aims to perform like that underlying index. As a result, index funds usually perform better than other types of mutual funds over the long term.

Index fund exposes you to a wide number of securities in one fund at a low cost and has minimal risk due to its broad diversification.

If you’re planning to invest in index funds, then you should read through this article to find out how you can invest in one and the reasons why you should invest in index funds.

How To Invest In Index Funds

Image depicting the stock market activities

The process involved in investing in index funds is not in any way complicated. You can get started with this low-cost investment follow the steps outlined below:

  • Understand Index Fund

This is the first step to investing in index funds; You should know what you want to use your money to achieve. An index fund is ideal if you’re looking to build wealth slowly over a long period; it’s not a get-rich-quick scheme.

  • Select The Index You Want

Carry out quick research to know all the potential indexes available so you can pick the best. There are a large number of different indexes you can track with index funds.

One of the most popular indexes is the S&P 500 index, and it is well known because it follows over 500 large U.S based corporations representing different industries.

Other than the S&P 500, other indexes include the tech-based NASDAQ composite, Wilshire 500, and many others. Pick the one that you desire and move on to the next step.

  • Pick A Fund That Tracks Your Selected Index

Now that you’ve picked the index you want, the next thing is to find the index fund that tracks it. Most times, you’ll find one or more than one type of index fund that tracks your index of choice. 

Popular indexes like the S&P 500 have several options, all monitoring the same index. To pick the best one, you should consider the one that follows the chosen index performance most closely and the one with the most minimal cost. So, consider all these things before picking the most suitable index fund for your selected index.

  • Decide Where To Purchase Your Index Fund

Once you know what you want, all that remains is getting it. But before you get one, you need to consider where to purchase your index fund from. You can buy your index fund shares from a brokerage or a mutual fund company.

When choosing where to buy your index fund, you should consider the cost and features, as buying from some brokers may be more expensive than buying directly from a mutual fund company.

On the other hand, a brokerage account could be the best choice if you’re the sort who likes to have all of your financial assets in one place.

  • Purchase The Shares Of The Index Fund
Examining the market for best purchasing option

After deciding where you want to get your index fund, then you can go ahead with buying it. But before buying it, you’ll need to open an investment account because you’ll need one to purchase an index fund.

While acknowledging the index fund, you can choose a fixed dollar amount to spend or pick several shares. But, of course, the share prices of your selected index fund and your investing budget affect the amount you’re willing to pay.

  • Track Your Index Fund

After buying your index fund, there’s nothing much left to do than track its performance. However, just because an index fund isn’t an actively managed fund doesn’t necessarily mean you should abandon it and expect it to grow.

You should always check your index fund to know if its fees are accumulating, so you can quickly re-evaluate, as the index fund shouldn’t be too costly.

You also need to check if it’s performing like its fundamental index because your index fund performance shouldn’t fall behind the index by much more than the title expense ratio.

Best Index Funds 2022

Index funds of 2022 to invest in

The best index funds offer investors greater diversification at minimal cost and risk with high returns.

Choosing the best index fund will make your process of building wealth with an index fund easier. Below are the best index funds in 2022:

  • Fidelity ZERO Large Cap Index

Fidelity Zero Index has no minimum investment amount and a 0.0% expense ratio. So it’s ideal if you want a diversified index fund in your portfolio at a minimal cost.

  • Vanguard Russell 2000 ETF

Vanguard Russell is a low-cost index fund that exposes you to small-cap industries with an expense ratio of 0.10%.

  • Schwab S&P 500 Index Fund

Schwab S&P Index Funds has no minimum investment amount and a 0.02% expense ratio. Therefore, it’s suitable if you want a broadly diversified index fund to serve as a core holding in your investment portfolio. 

  • Shelton NASDAQ-100 Index Fund
Image depicting nasdaq stock exchange

This type of Index Fund has an expense ratio of 0.5%, and it’s a good option if you’re interested in the tech industry and growth-oriented companies. 

  • SPDR S&P 500 ETF with an expense ratio of 0.095%.

There are other types apart from the ones above; with minimal research, you get to know the one that’s perfect for you; go for it and give it time to get the most out of your index fund returns.

Why Are Index Funds Better Than Stocks? 

A lot of investors find index funds better than stocks due to several reasons, some of which include:

  • In addition, while stock investment requires you to be actively involved in the stock selection process, index funds don’t require you. You get to save time for other things by going for this passive investment.
  • It also helps that index funds charge low fees, which means you, as the investor, get to invest more money and are far less volatile than stocks are, as stocks are pretty volatile in the short run.

Why Should I Invest In Index Funds?

An index fund is a great investment choice, and it has a lot of benefits which should be more than enough reason why you should invest in them. With index funds, you get to own a wide variety of stocks from large and profitable companies and get a part of their profits for yourself when you leave your investment to grow over time.

Apart from its broad diversification, it also helps that it involves low cost and minimal risk, which is a great plus for many investors.

Furthermore, it’s the type of investment that doesn’t need you to take a large portion of your time to actively manage it, as it is more of a passive investment.

An added perk is that the whole process is easy to understand and transparent, making it a perfect investment option for both beginners and expert investors. 

Best Reasons To Invest In Index Funds

Outlined below are reasons why you should invest in index funds.

1. Low Cost

Low cost is one of the primary reasons you should invest in index funds. In comparison to other investment funds, there’s a minimal cost attached to index funds, starting with their management fees.

The index fund’s expense ratio determines its management fee, so it varies with the value of your holdings. But generally, it’s relatively inexpensive as they are managed passively.

It also helps that index funds hold investments until index changes which don’t frequently happen, making them have little transaction cost. There are no hidden fees or anything, as all these little fees add up, resulting in a massive difference in your returns over time.

2. Low Level Of Risk

Investing in an index fund tends to be less risky than investing in individual stocks because they are widely diversified and spread your fund to help minimize investment risk.

This doesn’t-necessarily means you will always gain and not lose money. It just means that it will fluctuate far less than the individual stocks.

3. Less Time-Consuming

Your time is invaluable, and with an index mutual fund, you don’t have to worry about spending your precious time selecting and monitoring portfolio managers. This is because the funds don’t require active management.

You also don’t need to spend so much time following stocks or companies as index funds simply mirror the performance of a criterion index.

4. Build Your Investment Portfolio

Investing in an index fund is a good and easy way to build your portfolio. You get to build a highly diversified portfolio and follow your investment policy statement without any hassle.

Only the financial progress of the index you got needs to be tracked to ensure it’s not performing poorly. It also helps your portfolio achieve long-term growth as an index fund is known to outperform some actively managed funds.

5. Easy To Understand

Image depicting brainstorming on the best way to approach a business solution.

An investment strategy is generally complex to understand, and people tend to shy away from investment because of fear, but index funds are one of the easiest ways you can invest.

There are no complicated investment strategies with index funds, and it’s pretty transparent; nothing is hidden. You know what the fund is about by just its name. 

6. Extremely Tax Efficient

Another thing about index funds is that they are tax efficient than other investment options. This is because an index fund does not involve so much buying and selling off holdings compared to an actively managed fund; with these capital gains increasing, the tax bill isn’t overly generated.

7. Broad Diversification

A significant reason why you should invest in index funds is that it is worth it. First, you get a diversified portfolio, which helps minimize the risk of losing some or all the money you’ve invested. Investing in an index fund ensures your portfolio value isn’t too dependent on just a company as it diversifies it between several companies in the index with just a single purchase.

8. Good Returns

Good return on investment strategy

The core reason you’re investing is to get returns; investing in index funds requires low cost yet still yields attractive returns. Similar to all stocks, they also fluctuate, but over time, they’ve made good returns, making them suitable.

In addition, investing in good index tests with great companies will allow you to make high returns from investing in profitable corporations.

9. Minimal Research Is Required

Investing in indexes requires very little research, unlike the time-wasting analysis and examination that comes from investing in individual stocks.

For indexing, you don’t need to go through companies’ annual and earn reports to find leading companies with considerable profits to buy. Instead, all you need to do is know the market sector you want to best in, get an index that tracks performance, and put in your money.

10. No Biased Investing

Another thing you’ll love about investing in index funds is that it is based on stipulated regulations and automated investment methods. This has helped overcome human bias and minimize the scope for biased investing.

The fact that there’s also a defined mandate of the amount to be supported ensures that the fund manager can’t be personal when making investment decisions.

11. Passive Investment

Another good reason to invest in an index fund is that it is a passive type of investment. So it’s the ideal option if you’re the type of investor that doesn’t want a hands-on investment.

You just need to wait patiently and leave it for a long period to compound in value without any need to utilize your time reading companies earning reports.

You can even get one in preparation for retirement as you make the most of this investment by holding on to the funds patiently for your money to grow.

Frequently Asked Questions Concerning Best Index Funds

The following are questions asked by people who want to learn more about investing in index funds and the answers to them. 

When Should You Invest In Index Funds? 

There’s no specified time to invest in index funds. But generally, it’s better to buy when the market is low since One can’t predict the market fluctuations.

It’s better not to waste any time. Instead, you should invest in one as soon as possible because of the power of compounding value. The more time you are in the market, the more time it takes to grow.

Should I Put All My Money In Index Funds?

It’s better to put a portion of your money you don’t need instantly in an index fund because index funds are long-term investments.

While you’re just beginning, putting your money in an index fund is OK, but over time you might want to branch out to include other options in your portfolio.

Can Index Funds Make You Rich?

Investment returns and profits

You won’t necessarily become rich by simply having an index fund, but if you’re patient and disciplined, it might make you rich.

If you want to become rich off investing in index funds, you need to keep putting money in and not take it out even when the market crashes.

You should take advantage of it and buy more types of valued compounds when given enough time. This can make you huge money.

How Much Should I Invest In Index Funds?

Index funds usually have no minimum amount requirement, so you can use any amount you’ve budgeted for investing in an index fund. The key is consistency; you can keep adding a certain amount to your fund every month and not touch it for a long time so that it can yield high returns.

Final Thoughts

Index fund investment is easy to understand. Because you can easily get started, it is ideal for any type of investor. In addition, several benefits are attached to this low-cost investment, all of which have been previously mentioned, making index funds a smart investment option for you.

Because it doesn’t need hands-on management, it doesn’t also mean that you shouldn’t track your index fund. Instead, you should track it to make sure it’s not underperforming.

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