An Introduction to Investing in Index Mutual Funds

Investing in index mutual funds can be a solid way to grow your portfolio over the long term. Index funds have become a very popular form of investment over the last few years. Here are the basics of investing in index funds and how they work.

Financial Indices

In order to understand how index funds work, you first need to understand what a financial index is and how it works. A number of different financial entities have developed financial indices as a way to track the strength of the market. A financial index is a collection of stocks that is designed to represent a major sample of the stock market. One of the most popular financial indices out there is the S & P 500. The S & P 500 is designed to contain the 500 largest companies in the stock market today. By tracking the collective movements of this group of 500 stocks, you can basically tell if the stock market as a whole is up or down. A vast majority of the movement in the stock market takes place among these 500 stocks; therefore, it is a very important total market indicator.

Index Fund

Index funds are based upon these financial indices with the idea that it is very difficult to beat the market over the long term. However, historically, we know that the stock market always tends to go up in time. Therefore, if you can just stay with the market, you could get a nice return on your investment. An index fund is designed to track the exact movements of whichever financial index it is following. If the index goes up or down, the index fund moves accordingly.

How They Work

In order to track these financial indices exactly, it takes a special investment strategy. The index fund managers buy the stocks that make up the financial index. For example, with an index fund that tracks the S & P 500, the fund would purchase the 500 stocks of the companies that make up the index. Typically, index funds will weight the funds towards the bigger companies at the top of the fund as a measure of safety.

Investing in Index Funds

Investing in index funds is a very simple process that is designed for long-term investors. These funds can be purchased through any financial broker very easily, just like any other mutual fund. This type of investment is designed to create slow and steady growth in your portfolio. The movement of the fund will not usually be very volatile overall and will typically move very slowly. Therefore, as an investor, you should keep buying as many shares as you can over time. This is not a get-rich-quick type of investment and should be approached with a certain amount of patience. Your portfolio has the potential to grow substantially, though.



Subindex



A subindex is a type of index that is part of a larger index but is also tracked separately on its own. There are many financial indexes that are tracked by certain financial organizations such as the S&P 500. A subindex would be a smaller group of tracked companies that are also part of the S&P 500. By using a subindex, investors can get even more detailed information about investments and certain sectors of the market. This allows them to specialize in a particular subsector within an industry and potentially increase profits as a result.

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