Brisbane, Australia (PressExposure) May 13, 2009 -- So what is an index fund? It is an investment fund that is managed to track a particular sharemarket index, and so provide a very similar return that would be achieved from an investment in every company that is represented in the index.
An index fund is considered a passive fund, which differs from an actively managed fund that attempts to outperform the index. However, active funds employ teams of highly-paid analysts in their pursuit of outperforming their particular index, and as a consequence the fees that are paid out of investorâs funds are much higher.
Active management fees range from 1 - 2% pa of the capital that you invest, and a further 2 - 4% in commission is paid to the Financial Planner who helps you get into them. This means that you would need to earn a return of at least 3 â 6% on your funds in the first year just to break even!
The question that arises is whether you are receiving true value, or indeed a better return on your investment, from paying these extra charges in an actively managed fund?
Research has shown that less than 20% of fund managers will outperform the overall market in any given year, and those top-performing fund managers are not the same from year to year. Therefore investing in one of last years winners makes it unlikely that they will outperform the market again this year or next.
It is therefore almost impossible to consistently beat the index. Warren Buffett has said: âCheap tracker funds will beat most managed funds over the long term.â
So if managed funds donât regularly outperform the index, why not go straight to the source and buy an index fund direct? Here are some good reasons to buy an index fund:
â¢ It takes the pressure off your expectations â slow and steady proves itself time and time again â¢ Itâs cheaper to invest, it costs you just 0.3% of your invested capital or less in some cases â¢ Takes the stress out making individual investment decisions â¢ You can invest in them without having to go through a financial planner â¢ Index funds deliver better returns than most actively managed funds
Paying unnecessary fees for no additional benefit is not a good strategy in anyoneâs book. These fees come out of your capital before your funds are invested. Why pay for expertise when there is not a long term consistent result. Reducing the drain of fees on your investment capital will have a compounding effect over the long term, making a difference of tens or hundreds of thousands of dollars in your retirement capital.
Of course, unless you have been investing for a while and have access to impartial research, you probably haven't heard about index funds before. This is because index funds are rarely advertised, rarely make the top of the performance tables over a short period of time, and since they generally donât pay commissions, they are not considered by financial planners and advisers.
There is a whole series of index funds listed on the Australian Stock Exchange, which can be purchased for only the cost of normal share brokerage. These funds track the Australian S&P 200, as well as international indexes such as the American S&P 500, and the Global 100, Asia 50, Euro 350, and Emerging Market indices.
Things you can do in conjunction with your Financial Coach
â¢ Research investment options that suit you â¢ Develop your investment strategy and then stick with it â¢ Consider starting with an index fund as the core of your portfolio â¢ Take action today!
What you can do today to make a start:
â¢ Look for alternatives to managed funds â¢ Consider exchange traded funds and listed investment companies (another avenue to invest in the index) â¢ Check out http://www.asx.com.au â¢ Work with your wealth coach or a mentor
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