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An index fund is typically a low-cost, low-risk investment portfolio of stocks and other assets that tracks a financial market index.
They’re popular because they’re generally easy to trade and many don’t require a big investment. But it’s not guaranteed that all the funds in the index are safe — there’s still risk of volatility.
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Once you’re ready to invest in index funds, use a financial adviser, robo-advisor, full-service broker or online stock trading platform. One of the most accessible ways to start investing in index funds is with exchange traded funds (ETFs) — but not all ETFs are index funds and some are riskier than others.
Mutual funds are another index fund and can be purchased directly through their associated fund providers, such as Allan Gray, ABSA, Investec, and Coronation Fund Managers.
To invest in ETFs or unlisted mutual funds:
Ask yourself what you want to achieve through this investment. Consider your timeframe and how much risk you’re willing to take on. Will you need to withdraw the funds in a year, or do you plan top sit on them for 10 years?
Compare funds online to find a product that matches your goals. Consider the risks, the fund’s performance, the brokerage fees and other costs.
Key things to take into account when deciding on an index fund:
Once you’ve found the right product, find out the best way to access funds.
Access index funds through their fund providers.
Access ETFs on most online trading platforms and purchase just like any other stock. Sign up for an online stock trading platform:
Index funds pool money from multiple investors to diversify your portfolio. They generally take a hands-off approach to investing compared to managed funds.
Because index funds don’t require active management, they tend to cost less than managed funds, and don’t cost as much to invest in.
To understand an index fund, it’s important to know what an index is. A market index helps you understand index funds. The most well-known index is the S&P 500, which is a collection of the top 500 companies in the US stock market.
These indices are popular because investors use them to track the overall performance of a market. They rise and fall depending on a range of economic indicators and company news. For example, when an economy is healthy, its stock market indices tend to rise because investors feel more confident buying stocks. If trade tensions increase between countries, stock market indices usually fall as investors become nervous.
Index funds hold the same selection of stocks that make up the index they follow. Here are a few examples of index funds and their underlying index:
If a company leaves an index, the fund manager sells its shares and replaces it with new stocks. Because these kinds of funds require minimal management, it’s known as passive investing. Index funds can be either ETFs or mutual funds.
Most ETFs are similar to traditional index mutual funds in that they are low cost and track a major underlying index, though there are a few key differences:
|Trade and listing||Pricing||When to buy and sell||Minimum investment||Fees|
|ETFs||Traded like shares on the stock exchange||Market value, depends on stock market performance||Any time during the trading day||Lower minimum — sometimes under R1000|
|Mutual funds||Unlisted and bought from issuer||Net asset value of underlying securities.||At the end of the trading day||Can require as much as R2,500 or more|
A few bright spots for index funds:
No investment is ever 100% safe and you should always seek professional advice before making any investment decision. Here are some of the risks that investors need to be aware of:
Index funds are well-diversified, accessible investments, making them a popular choice for new investors. But there are also more complex and risky ETFs thrown into the mix of most mainstream brokerage accounts. It pays to familiarize yourself with their benefits and dangers, and to compare brokerage accounts before putting your money to work in the stock market.
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