If you’re new to investing and want to invest some of your hard-earned cash into the stock market with the aim of making solid long-term gains, then you have several options. You can invest in individual companies yourself, you can invest in a managed mutual fund, or you can invest in an index fund.

It’s this final option that I want to discuss - investing in index funds. Index funds are basically funds that follow a particular share index such as the FTSE 100, Dow Jones, S&P, etc. If this index goes up by 10%, for instance, then the index fund will also go up by roughly 10% (although it’s often slightly less).

Index funds are fully invested in the companies within this index and therefore the results are broadly in line with the overall market. Minimal management is required because the manager of the fund automatically invests money into the individual companies within that index.

There are costs involved but these are relatively small (they vary from anywhere between 0 and 2.5%) but they do have their benefits because they are a safe way to invest and the minimum investment needed is often relatively small. Plus of course you can often add to your investment over time whenever you have some spare cash, and you can even make regular monthly payments if you so wish.

Indeed this is a solid investment method because you can average out your costs and even if the actual index falls, you will still be buying in at lower levels so you will be able to benefit from any long-term gains when the index rises again in the future. I would, however, suggest that you still keep on eye on the markets because it’s always a good idea to try and invest more in a particular index when it appears to be trading at oversold levels.

On the whole, index funds are an excellent, and very affordable way to gain exposure to the stock market without having to make any trading decisions yourself. Obviously it’s best to invest in these index funds when they are trading at lower levels because this will increase the chances of you making substantial long-term gains.

 

 

Filed under: Index Funds

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