Index Fund Education
Want to learn more about index funds?
You've come to the right place.
This section takes you through the absolute basics of managed funds, index funds, including how to buy them.
What is an index fund?
Let's say that you wanted to buy shares in all of the companies listed on the stock exchange. How would you do it?
If you had to buy them one by one, you would pay brokerage fees for each investment and you would need a huge amount of money to pay for them all... like... a lot!
Fortunately, you can buy into an index fund which does it for you.
How does an index fund work?
Index funds are managed funds managed by a professional finance company to track the performance of an 'index', like Australia's ASX 200, which includes 200 companies, or the USA's Dow Jones, which includes 30 companies.
What is the Dow Jones index?
When you buy into the index fund, you get exposure to all of the shares included in the index.
For example, if you invested just $500 in an index fund, the fund manager would go and buy each share in the index after pooling your money with other investors in the fund.
How can I buy an index fund?
Some index funds are listed on the sharemarket as an Exchange Traded Fund (ETF), so they can be bought and sold like a normal share using your share broking account.
Many other index funds require you to apply directly to the fund manager, which requires you to fill out paperwork.
Are all ETFs also Index Funds?
Even though the terms "ETF" and "index fund" are sometimes used interchangeably they are not the same thing.
An 'ETF' is like the candy bar wrapper around a managed fund. What's inside the ETF is the managed fund. The managed fund could use a stockmarket index strategy, it could be a bond fund, invest in property, chocolate, etc.).
The strategy is what you should focus on.
Are Index Funds Risky?
It's important to remember that index funds have risks, and the performance will vary depending on which index your fund follows.
As always, you should carefully read the product disclosure statement (PDS), which must be issued by a company which runs an index fund.
It takes just a couple of minutes of reading to understand an index fund, but it could save you thousands of dollars!
What is an ETF?
How do I know what's right?
If you are confused about the potential benefits and risks of index funds or investing, a trusted and licensed financial/investment adviser can help you make an informed decision. A qualified financial planner can take into account your risk profile, goals, needs and objectives.
Alternatively, we recommend that you get research from an unbiased professional investment research company. We offer this research. We're different to financial planners because we provide ‘general financial advice’ on investments only -- and we don't receive commissions.
Regardless of what you choose to do, we think it’s smart to read the PDS or ‘product disclosure statement’ before investing in any fund.