An index fund is a type of mutual fund that aims to track the performance of a specific market index, such as the S&P 500 or the Nasdaq, rather than beat it. An index fund is easy to buy and has low maintenance costs. Index funds are also some of the lowest-cost mutual funds available today. In general, an investor can purchase an index fund in one of two ways: buying directly from the mutual fund company or broker or buying it through another financial institution such as an online broker or investment management firm. An index fund is not something you’ll find at your local grocery store. But luckily for investors interested in this product, there are several online brokers and investment management firms that specialize in selling different types of investments called “index funds” to retail investors like you.
How to Buy an Index Fund Online: A Step-by-Step Guide
Before you buy an index fund, you should consider your financial goals, investment time horizon, and risk appetite. Index funds can be useful for a wide range of investors and goals, including:
“Behind every stock is a company. Find out what it’s doing.” — Peter Lynch
Direct Investment Through an Investment Management Firm or Financial Institution
Depending on the online broker or financial institution you choose as your investment manager, you may have the option to directly invest in index funds. This means you will be directly buying shares of a fund that holds the stocks in the index. Index funds are typically passively managed. That means the fund manager buys and sells the stocks in the index according to the rules of the index. This is different from actively managed funds, which try to “beat” the index by purchasing stocks that the manager believes will outperform the index. The direct-investment approach provides you with more transparency and control. You’ll know exactly what funds you own and where your money is invested. This is helpful because you’ll be able to see how your investment has performed over time, and you can track your progress toward your long-term financial goals. The direct-investment approach can be more expensive because you’ll pay a fee every year for the management of the fund. However, some financial institutions let you buy shares of an index fund as a no-load fund. No-load funds don’t charge an upfront sales charge when you buy shares in the fund.
Buy Through a Robo-Advisor
A robo-advisor is an online financial advisor that offers investment advice and low-cost, diversified portfolio management. Robo-advisors usually specialize in low-cost index funds. You can open a new investment account with a robo-advisor to buy index funds. Some robo-advisors also offer managed funds, which are funds that use some sort of active strategy. Managed funds are a different type of product than index funds. Before you buy, make sure you know what type of fund you are buying. Roboadvisors make the investment selection process incredibly simple. All you have to do is answer a few questions about your financial goals, risk tolerance, and financial situation, and the robo-advisor will make the investment selection decisions for you. Depending on the robo-advisor, you may have the option to buy an index fund. Index funds typically track an index, such as the S&P 500 or the Nasdaq, and typically make up the core of most robo-advisor portfolios.
How to Buy an Index Fund in Person
If the investment management firm or financial institution where you want to purchase your index fund does not offer direct investment, or you want to buy a managed fund, you can purchase an index fund in person from a broker or investment advisor. You can find an investment advisor through FINRA BrokerCheck or the Investment Adviser Public Disclosure website. When you buy in person, you’ll likely be buying a managed fund, not an index fund. There are some important differences between managed funds and index funds. Index funds are passively managed and managed funds are actively managed. The fund manager makes investment decisions with a managed fund, whereas an index fund follows a pre-determined set of rules that tells the fund manager when and what to buy and sell.
Conclusion
An index fund is a type of mutual fund that aims to track the performance of a specific market index, such as the S&P 500 or the Nasdaq, rather than beat it. An index fund is easy to buy and has low maintenance costs. Index funds are also some of the lowest-cost mutual funds available today. An investor can purchase an index fund in one of two ways: direct investment through an investment management firm or financial institution and buying through a robo-advisor.
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