Index Funds
If you have decided to invest capital in a portfolio mutual funds, then you should be aware that there are different types of mutual funds.
The normal investment company fund will leave the selection of stocks and shares to the judgment of the investment manager and you, as the investor, have no contribution into the decision of where your investment goes. This is a passive investment.
If you want to have a more active role in the choice of investments, but do not have the time or information to take the necessary decisions, you should look into the option of index funds.
Index funds are an attractive variant on traditional, managed funds in that you get to tell the investment management of your particular fund, which general region of the global market that you want to invest in.
For instance, the asset manager of a general mutual fund will invest wherever in the world the manager of that fund thinks fit, but with index funds, you can specify fields like the Pacific Basin or mining stocks.
This permits you, the investor, the chance to narrow the field of investment if you have a hunch that money is moving in a definite direction, but do not have enough information to manage your investments yourself.
With some of these index funds, you can specify that they track an index too. In our instance, the tracking fund would invest in proportion to, say, the top 50 stocks in our given sector,say, the Pacific Basin.
Index tracking funds empower the investor who has a hunch, but who does not have the time or even maybe the ability to track investments in a chosen field. The down side is that some of these index funds are expensive to be in. On the other hand, these actively managed mutual funds frequently outperform the targets of the investment industry.
There is a reason for this extra expense in some types of funds but not in others. For example, if you go into a general performance fund dealing only in green things, there will almost certainly be a lot of investors with you; but if you stipulate Chinese green products, you may be practically on your own and so charges for the fund manager’s time will increase.
This is easy to understand, but can be quite difficult to put up with, unless you choose your niche market well Herein lies the trick of opting for index tracking funds - you are going for niche markets that you think that you understand.
Many of these index tracking funds are no-load funds, so you have to take that into account before arriving at your decision to invest or not.
Index funds are best suited to those who read the papers and who pride themselves that they have an idea about what is going on in the markets, although they do not know the details of which company does what and where.
This does not mean, however, that index funds are maintenance-free financial products - all investment vehicles need reviewing at least once per annum. Rather, if you ‘bet’ on the Pacific Basin and your investment pays off (or not), you might want to switch to a different sphere of interest at a later date.
Owen Jones, the writer of this article, writes on a variety of topics, but is now involved with Index Mutual Funds. If you would like to know more, please go to our website at Mutual Funds
