An index fund allows you to enjoy the good parts of a mutual fund, with little or none of the bad, by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market. An index fund builds its portfolio by simply buying all the stocks in a particular index - the fund buys the entire stock market, not just a few stocks. The most popular index of stock index funds is the Standard & Poor`s 500, but there are index funds that track 28 different indexes, and more are added all the time.
An S&P 500 stock index fund owns 500 stocks - all the companies that are included in the index.
According to Chetan Patel, VP-PMS, Sushil Finance (P), `` this is the key distinction between stock index funds and ``actively managed`` mutual funds. The manager of a stock index fund doesn`t have to worry about which stocks to buy or sell - he or she only has to buy the stocks that are included in the fund`s chosen index. A stock index fund has no need for a team of highly-paid stock analysts and expensive computer equipment that goes into picking stocks for the fund`s portfolio. So the hard part about running a mutual fund is gone. ``
An S&P 500 stock index fund owns 500 stocks - all the companies that are included in the index.
According to Chetan Patel, VP-PMS, Sushil Finance (P), `` this is the key distinction between stock index funds and ``actively managed`` mutual funds. The manager of a stock index fund doesn`t have to worry about which stocks to buy or sell - he or she only has to buy the stocks that are included in the fund`s chosen index. A stock index fund has no need for a team of highly-paid stock analysts and expensive computer equipment that goes into picking stocks for the fund`s portfolio. So the hard part about running a mutual fund is gone. ``
``Investing in stock index funds is often called passive investing, since the funds don`t use the same active management techniques as other funds. Passive investing has two big advantages over active investing. First, a passive stock market mutual fund is much cheaper to run than an active fund. Eliminate those analysts` salaries and an index fund can cut its costs tremendously - and those savings can be passed along to investors in the form of higher returns, `` he adds.
Chetan Patel is VP- PMS, Sushil Finance (P) since October 2007.
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