How to invest in index funds

Find out the benefits, the risks and how you can get started with investing in index funds.

Index funds are a popular choice in investing, as they give you the opportunity to invest in a whole bunch of things without paying a load in dealing fees. You can invest in index funds with most investment providers, such as IG, Hargreaves Lansdown and Vanguard. In a nutshell, an index fund is a low-cost portfolio of shares and other assets that tracks a financial or stock market index. Find out more about what a stock market index is, why people invest in index funds and how you can get started.

What are index funds?

Index funds are portfolios of stocks, shares and other financial assets. Instead of buying individual shares in companies, you can invest in several at once, through an index fund.

Usually, with fully managed investments, fund managers buy and sell assets within that fund and attempt to predict the movements to try to earn the clients (you!) a profit. This is known as “active” management.

Index funds are managed differently. They are a group of company stocks that attempt to mimic a financial index (explained above). Because of this, they don’t need as much intervention from fund managers, which typically saves money.

What's a stock market index?

A stock index is a collection of stocks listed on the stock exchange. In the UK, we have the FTSE100 (pronounced footsie one-hundred). “FTSE” stands for Financial Times Stock Exchange. In short, it’s the 100 biggest companies listed on the London Stock Exchange (LSE).

There are loads of different stock indices, like the FTSE100 and the NASDAQ. In general, investors use these to get a general picture of how healthy the market is. The values tend to rise and fall depending on economic indicators and company news. When the economy is doing really well, its stock market indices will rise in value, as investors feel confident. The opposite is also true; if investors are feeling less confident about their investments, they might decide to sell. If everyone is selling, the price will decrease. A great example of this is the sudden crash in the stock market shortly after COVID-19 was declared a pandemic.

How do index funds work?

Index funds have a portfolio that is designed to match a stock index. For example, the FTSE100 Index Unit Trust tracks the FTSE100, a collection of the UK’s largest 100 companies. The fund invests in all constituent shares of an index in the same proportion of the index. Sometimes it isn’t possible to do this in full, so the fund uses a sampling process.

Index funds are considered comparatively safe, compared to directly buying shares in a company. As you might have guessed, this is called “passive” investing, due to the minimal management it requires.

How to invest in index funds

It’s as simple as choosing a provider that sells index funds, such as Vanguard or Hargreaves Lansdown and choosing a fund. There are a couple of things you may need to consider:

  1. What’s your strategy? Think about how long term this investment is and how much risk you’re willing to take on. It’s not wise to go with the riskiest fund if you’re cautious about losing money.
  2. Do some research. It can be tempting to go with the first choice available to you, but it’s worth making sure the provider and fund you choose suits you and your goals. Look at performance and fees to get a bigger picture.

When you’re ready, just sign up for an online share trading platform. To do this, you’ll need to:

  1. Sign up for a provider. You’ll need to provide personal details and proof of ID
  2. Fund your account. Transfer money into your trading account by bank transfer or using your debit card.
  3. Search for the index fund you want. Most providers let you browse index funds.
  4. Place a buy order. That’s it!

Best trading platform for index funds: IG

IG Share Dealing
Finder score
★★★★★
User survey
★★★★★
We chose the IG as our top pick because:
  • Invest in over 10,000 shares, funds and investment trusts.
  • Low costs – Zero commission on US shares, £3 on UK shares.
  • Support available 24 hours a day from Sunday to Friday.

Need to know: If your account is inactive for more than 24 months, you will be charged a rolling fee for account inactivity.

Read our review of IG.

Should I invest in ETFs or index funds?

Exchange-traded funds (ETFs) are considered to be pretty similar to index funds as they are low-cost and track a major underlying index. There are a few differences between them:

  • ETFs are listed on the stock exchange.
  • They’re priced differently. The price that you pay for an ETF is fixed at the time of sale. Meanwhile, the value of index funds isn’t calculated until the close of the trading day, when their Net Asset Value is assessed.
  • Fees and changes. You don’t usually pay any commission for index funds, while you would with ETFs.

Why invest in an index fund?

Index funds tend to do pretty well, compared with other types of investments. There are loads to choose from, and often providers will have pre-made lists with a selection of their favourites. You can also often choose ready-made portfolios which are built by experts and based on your attitude to risk.

What are the benefits of investing in an index fund?

  • Index funds cost less. As they are passive, they don’t need as much legwork, which means they change less than active funds.
  • Easy to trade. You don’t have to spend time buying and selling shares, saving you a bit of time.
  • They diversify your portfolio. This is a fancy way of saying that you get access to a range of different companies in one go.
  • Someone else does the work. Usually, people choose to go with index funds because they can pay someone else to do the hard work. This is great if you’re not really sure how this investing malarkey works.

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

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