| What are Index Mutual Funds?

What are Index Mutual Funds?

One problem with mutual funds is that there are so many out there that you don’t know which to invest in. Some mutual funds will claim they can make you an above average return. What is above average?

There are different benchmarks when considering the average return of the markets. It’s not a simple as averaging all the stocks in existence, there are just too many to do this. Finance professionals usually use an Index to figure this out.

What is an Index?

If you really want to understand what an index is and how it works, you need to get into statistics. For those of us who aren’t so interested in statistics, an index simply measures the changes in the stock market by using a small sample of stocks.

There are several different Indexes with the most popular being the Dow Jones Undustrial Average (DJIA) or the Dow for short, and Standard and Poor’s 500 (S&P 500). The Dow is a collection of 30 different stocks where the S&P 500 is, you guessed it, 500 stocks.

What do they have to do with mutual funds?

An Index mutual fund is a mutual fund made up of the stocks found in the specified Index. For example, an S&P 500 mutual fund is a mutual fund that contains all the stocks in the S&P 500.

Index mutual funds do not rely on the “expertise” of a “professional”, instead you are getting a rough average of the market. If you can’t beat the market, you can at least do as well as the market.

Why should you invest in one of these?

If you want to make the average that the market makes, Index funds are perfect for you. Many funds will say they can earn you more but often fail to do so. The least you can do is consistently earn the average, why not go for it?

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