Mutual Fund Site

Although there is a lot to be said about investing in Index Funds rather than actively managed mutual funds, the decision as to which Index Fund in which you should invest is no easy task. Search for the term Index Funds at Yahoo! Finance and you will get no less than 650 results! This is an astounding number of mutual funds to sift through and choose from. And of course, like actively managed funds, not all index funds are created equally.

Are Index Funds Right For You?

There are several reasons these funds appeal to investors. For many, it could be the expense ratios, which are typically lower on index funds than they are for actively managed funds. But probably the biggest reason why people will chose and index fund over active funds is that it eliminates that element of personal theory and beliefs that active funds come with. This is a risk, after all.

Since many active funds are measured against an index of some sort, the logic behind choosing them over active funds makes sense. For example, if you have a mid cap, actively managed fund whose performance will be measured against the S&P 400 MidCap Index, the fund will be deemed a smart investment if it outperforms the index and a bad investment if it under performs. Holding the index itself allows investors to own that index without having to worry about over and under performance because the manager of the index fund typically “mirrors” that index.

And because investors are always asked to measure performance of a given fund against the index before dumping it after a “bad” year (and firing their planner or advisor), owning the index itself saves people from second guessing those initial investment choices.

What Kinds of Index Funds To Own?

Determining the type of index funds work best for you always starts with knowing your asset allocation model. For true index investors, the core holding of a portfolio will typically start with a basic Index, such as the S&P 500 index (which would be achieved through something that sounds similar to “US Stock Index Fund”). This will typically cover a wide range of securities and ensure your portfolio is managed according to the most-broadly followed index of all.

But as one starts to specialize, investing in other types of index funds becomes necessary… and a little more complicated. For example, emerging markets index funds will pose a little more risk than your standard US Stock Index Fund.

Even if you do not need this type of specialization in your portfolio, even weighing heavier on different investment styles becomes a bit of a chore. One of the index funds we like at the Mutual Fund Site is the Dreyfus MidCap Index (PESPX), which we intend on reviewing here in the next couple of days. In fact, we would opt to own this fund over a broader-market index fund simply because of its attractive dividend yield and the fact that this segment of the domestic market appeals to us. (More on that in our official review in the Index Funds section).

With these facts in mind, it is obvious that investing in index funds is not necessarily any easier than invest in traditional growth funds or any other type of actively managed mutual fund. However, we plan on making your venture into index funds a little easier throughout the month of September when we will review at least half a dozen different index funds that should show up on your short-list.