Should You Invest In Index Funds?

Investment | September 7, 2009 at 4:40 am




Index funds seem to be quite a good investment option for you these days especially while you’re nursing the financial wounds that the recession has made on you. They are low-cost investments and involve low market risks. Though they don’t give you whooping returns, over a period of time they grow steadily to give you good returns. This is the reason many retirement accounts are replete with index funds.

SmartMoney.com has listed out 10 of the most competitive index funding opportunities based on their asset bases and inputs from financial advisors. The list is topped by Powershares QQQ with a YTD return of 35.6 %. Schwab Fundamental US Large Company stands 2nd in the list with a YTD return of 34.9 % followed by Rydex Equal Weight S&P with a YTD of 30.4 %. RevenueShare Large Cap, Vanguard Total Stock Market, iShares Russel 1000, Vanguard 500, iShares S&P small Cap 600, SPDR Dow Diamonds, and Wisdom Treee Total Dividend are the next seven on the list that offer a YTD from 10-19 %. While you consider investing in one of these index funds, I’d like to remind you of the advantages and disadvantages of investing in index funds in general so that you are better equipped with your judgmental resources to decide upon whether you’d like to make investments in these slow moving funds.

Why You Should Buy Index Funds?

  • You get the cream of mutual funds- By investing in index funds you get all the benefits of mutual funds. You’re not buying stocks from only one company, but from a lot of other companies. The index fund has a far reach. When you are buying from an index you’re buying more a lot of stocks and not merely a small umber of stocks. There are index funds that track more than 28 different indexes for stocks and that’s quite a big number. Some allow even more.
  • Don’t have to keep a track of individual stocks – An advantage of buying indexed funds is that you don’t’ have to keep track of stocks of individual companies as in the case of mutual funds where you need to actively keep a track of the stocks of individual companies. You must be already acquainted with the S&P funds. They own 500 stocks.
  • The index funds manager can avoid the pain of buying and selling individual stocks- The index funds manager is also a happy person at the end of the day as he has less work to do on this account. As in the case of mutual funds, he does not have to track stocks for individual companies.
  • Lesser infrastructure and human resources required – for tracking your indexed funds you don’t need the services of a financial analyst or a computer software, as in the caser of mutual funds where the analyst needs to check up from time to time the status of a stock for buying or selling. This saves upon the expenditure involved in the maintenance of the infrastructure and human resources.
  • index fundsIndexed funds are better performers than active funds- With volatile market conditions, active funds are always on turbulent waters due to which their values keep fluctuating very often in a short period of time. Indexed funds on the other hand,  being relatively static are immune to such turbulence unless it happens for quite a long period of time. Last year has a lot of mutual fund flops. More than 85 % of mutual funds didn’t meet up with the S& P goals.

Why you should not buy Index Funds?

  • Expensive stocks- When you buy an index fund, you are buying from a range of companies. The index operators always purchase expensive stocks. In fact they purchase stocks from a group of big companies which are based on market capitalization. The index stock buyers, rather, make it a point to purchase stocks from only those firms that have stocks that have shown good share price profits. By purchasing from such indices you are paying more for such stocks. As advised by analyst Rob Arnott, you should purchase those indices that are not market capitalized as they perform better than the market capitalized ones by about 2 %. According to Arnott, you should invest in indices that are based on P/E, price sales etc. that are not based on market capitalization but on more fundamental factors.
  • Stocks only from within index range – though index funds track a range of funds and not individual as in the case of mutual funds, mutual funds have the advantage of tracking the stocks of companies that are outside the rangInvest In Index Fundse of the index funds. In the case of indexed funds you’ll only get to purchase the stocks of only those companies that are listed with the index. Companies that are outside the index cannot be availed of even if they show good performance. This advantage lies with mutual funds which have the advantage of buying shares of companies that are beyond the list.

Index funds have their own advantages and disadvantages, but from the SmartMoney. Com report you can see that purchasing index funds in the present is one big lucrative business investment that you should not miss out upon.

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5 Comments

  1. Those are some good pros/cons to help investors start thinking. There are also many many more as well. Investors need to really do alot of homework prior to investing in index funds. This is especially necessary as index funds are being pushed by all retail banks as the newest thing. However, there are alot of misconceptions, limitations, and myths that investors need to know so that they can properly determine whether or not they are a good investment for each individual. The DIY investor crowd has also jumped on the index funds bandwagon as well. I’ve written an article that outlines the limitations, myths, and misconceptions that investors need to know.

    http://investmentblog.wordpress.com/2009/07/23/index-funds-and-the-diy-investor-herd/
    .-= Investment Blogger´s last blog ..Warren Buffett and Mars Inc To Buy Wrigley =-.

  2. I’ve also added your site (Financial Culture) to my blog roll. If you would like, feel free to add mine to yours. Thanks. Keep up the good work!
    .-= Investment Blogger´s last blog ..Warren Buffett and Mars Inc To Buy Wrigley =-.

  3. Amy says:

    Dividends have little or nothing to do with whether a stock is a good buy. If a dividend is extremely high, it is probably not sustainable. Dividends can always be cut. The most important thing is the over-all market trend. The other main thing is earnings growth. If a company keeps increasing its earnings 25% every quarter, that stock will go up even if it pays no dividend, whereas a high-dividend stock that decreases its earnings every quarter is going to go down even in a good market.

  4. Stewie says:

    This is a great article, interested in seeing more about this topic.

  5. Stewart says:

    Great article, hope to read more similar ones soon.
    .-= Stewart´s last blog ..Pick Value Stocks Now!5 ideas to hedge a declining market =-.

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