What Is an Enhanced Index Fund?

An enhanced index fund is a type of fund that tries to exceed the performance of the stock market. These funds have become very popular in recent years and there are several different enhanced index funds that you could invest in. Here are the basics of the enhanced index fund and how it works.

Index Fund

This type of fund is a variation on the index fund. An index fund is a type of mutual fund that aims to completely replicate a financial index. By doing this, the fund attempts to capture the growth of the market without a lot of active management. Index funds have been very successful over the years and there are many investors that are currently using them. The idea behind an index fund is that you can be profitable if you lower the costs associated with the mutual fund and simply keep up with the market as a whole.

An index fund is going to track a particular financial index. For example, you might get into an index fund that tracks the S&P 500. The index fund manager is going to buy every stock that is contained within the S&P 500. By doing this, they will be able to get all of the gains from the movement in the S&P 500. The only time they will buy or sell stock is if a company is subtracted from or added to the S&P 500.

Enhanced Index Fund

An enhanced index fund is a type of fund that utilizes the same principles of the index fund except that they try to beat the performance. Instead of simply utilizing passive management techniques, the fund manager is going to try to beat the index. In order to do this, the fund manager is going to use the financial index as the base for the underlying investments. From that base, they will subtract from or add to in order to try to increase the returns. In most cases, the fund manager is going to get away from some of the large cap companies that are over valued in the market place. They will take some of the money that is allocated to that group of stocks and use it to purchase more shares of the smaller companies in the index. Typically, the same stocks are going to make up the enhanced index fund. However, they will be allocated differently than the financial index itself.

Risk versus Reward

If you are considering investing in this type of fund, you will need to consider the risk and reward. By investing in this type of fund, you could potentially increase your returns over what you would be able to get from a straight index fund. At the same time, you are going to be taking on additional risk because the fund managers are going to be using active management techniques. Anytime active management is used, something could go wrong.

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