Index funds have been around for several years, and their presence has really shaken up the financial markets sector. That’s because they offer retail investors a simple and affordable way for beginners to get started in stock market investing. An index fund is essentially a basket of stocks, and the fund is managed by a team of professional investors. Rather than buying individual stocks, the investor can buy an index fund and immediately own multiple stocks.
Why invest in an index fund?
The reason index funds have become so popular is that their fees are very low or even non-existent. This makes it an affordable way for beginners to start investing with little money. But they also offer a way of passive investing in areas of interest to the individual without having to do much groundwork. They’re a hands-off way to get involved in the market if learning and researching is of little interest.
Personally, I love reading and writing about the stock market and I’m fascinated by the wealth of information and dynamics going on in the world of stock market investing. This leads me to comfortably invest in a mixture of funds and individual stocks. However, this is understandably not everyone’s cup of tea, and that’s where index funds are a marvellous invention.
Which index funds are popular?
Funds also give investors a chance to choose a specific sector that’s important to them. For example, a renewable energy fund, a technology fund, or a commodities fund. For an investor who wants to invest in US stocks but finds it daunting, a US index fund can be a great choice. Vanguard S&P 500 ETF is a favourite as it tracks the S&P 500 index. Whereas JP Morgan Emerging Markets fund includes companies based in China, South Korea, India and the US.
Meanwhile, for those who like the idea of investing in FTSE 100 companies, the iShares Core FTSE 100 UCITS ETF is a popular choice. Overall, index investing gives beginners a chance to dip their toe in the stock market without feeling overwhelmed.
Buy and hold
However, for those of us who enjoy the learning process, buying individual stocks to hold for the long term can be extremely lucrative. If the full process of investing appeals, and if learning about capital markets, businesses and sector growth is something we want to pursue, then index funds can be the perfect springboard on the quest for financial freedom. Owning a basket of stocks gives investors a glimpse into how several companies perform over time.
Both approaches have their advantages, of course. Billionaire investor Warren Buffett has a bullish take on index fund investing. He primarily advocates a buy-and-hold strategy of purchasing shares in individual companies. But he also sees the benefits to retail investors of doing both. I agree with this as it also helps give diversity to a portfolio, which is really important for reducing risk.
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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.