News » Why the interest in index funds?

November 1, 2019

As the name suggests, an index investment fund seeks to deliver a similar return, less fees, as its chosen index. In its simplest form an index fund purchases the same shares in the same proportions as its index. For example, an S&P/ASX 200 index fund will hold shares in Australia’s 200 largest companies. An MSCI BRIC index fund will invest in major companies in Brazil, Russia, India and China. Index funds cover shares, commodities, precious metals and other asset classes.

With a vast range of indices to choose from, index funds are a useful tool for investors seeking access to both broader and more narrowly focused segments of global investment markets.

The alternative to index (or passive) investing is to either pick individual shares or to invest in an active fund. Through stock picking and active trading, active fund managers seek to outperform their selected indices.

Both index and active funds may be listed, in which case units are traded on a stock exchange in much the same way as shares. Or they may be unlisted, with investors buying and redeeming units directly with the fund manager.

Why the popularity?

There are several reasons why index funds have become so popular:

What are the disadvantages of index funds?

Index funds do have some downsides:

How can index funds be accessed?

Index funds can be held directly, just like any managed fund. Many investment platforms include unlisted index funds on their investment menus, and may also provide access to listed index funds. Public offer superannuation funds that provide a wide range of investment options will usually have a number of index funds on their lists.

What’s right for you?

At one extreme there will always be determined DIY stock pickers with no interest in managed funds of any variety. On the other hand there are investors for whom index funds provide all the tools they need to construct well-diversified, low cost investment solutions.

Between them is a large group of investors who use index funds to build the foundation of their portfolio while looking to add some icing to the cake via active funds or share selection.

There are many ways in which index funds can help you reach your investment goals. To find out more, talk to Aspire2 Wealth Advisers today.