Investing in a FTSE 100 index fund is a great way to get started in stock market investing. If you have £3k ready to invest and are not sure where to put it, that’s understandable. The stock market is a volatile place right now and confusing for beginners to stock market investing. That’s why I find index funds appealing because they limit risk and give you a piece of many stocks rather than one or two.
Why choose a FTSE 100 index fund?
A FTSE 100 index tracker fund allows you to own a piece of the entire index, rather than its individual constituents. So instead of buying individual stocks, such as when the AstraZeneca or BP share price looks to be a bargain, you can own all of them. This collective investment reduces risk because you follow the ups and downs of the entire index, rather than risking the volatility of individual companies. It also diversifies your investment because the FTSE 100 index includes many sectors such as energy, finance, aerospace, and pharmaceuticals, to name a few.
Index investing follows a passive investment strategy. An active investment strategy usually involves a fund manager choosing specific stocks they believe will beat the index over a certain period. Actively managed funds tend to cost more than passive investments because they require more effort to set up and monitor.
What return can I expect from an index fund?
Nearly half the FTSE 100 constituents have slashed their dividends this year since the coronavirus outbreak and earnings cover remains low. This indicates the likelihood of further dividend cuts as the year goes on. Despite this, analysts expect the FTSE 100 index to realise a 3.6% yield for 2020.
For income investors, the dividend was the attraction to many individual stocks. Without it, investing in specific stocks looks less appealing and index funds may be the preferred option.
A 3.6% yield may seem low compared with single stocks offering yields as high as 10%, but it is more than many bank accounts offer. Plus, in a time of volatility and uncertainty, many investors prefer to opt for lower gains in return for reduced risk.
I think index funds are a great way to dip your toes in the stock market without going too deep. But if you are new to stock market investing, you need to keep in mind that even index funds are not risk-free. Research how to invest in index funds and take your time with your investment decision. The value of your investment will fluctuate with the index, but historically the FTSE 100 has always risen after a market crash, to surpass previous lows. Examples of FTSE 100 index funds you might like to consider are the iShares 100 UK Equity Index Fund or Vanguard FTSE 100 index Unit Trust. If I had £3k to invest in July, I would happily buy one of these.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.