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Factors to consider before investing in Index Funds

Diversification is the key to a successful investment portfolio. When it comes to equity investing, the equity portfolio is diversified by investing in different shares of companies to reduce risks. This is where index funds step in. An index fund is a type of investment that is responsible for tracking a market index that is made up of bonds or stocks. Thematic investing is the most common strategy to invest in Index Funds.

Important aspects to consider before investing

·         Expense Ratio 

The expense ratio refers to a small percentage of the fund’s total assets which is charged by the fund house. The low expense ratio is one of the largest USPs of an index fund. There is no need to create any kind of investment strategy to find stocks in order to invest.


  • Prefer custom investing

Custom Investing is known to be the next evolution of index investing where the custom index will invest and rebalance based on a particular methodology. Custom indexing a form of technology that is responsible for removing all the possible barriers from index investing.


  • Investment plan

When an investor crosses the investment horizon of 7 years, index funds are then recommended to them. These funds mostly fluctuate in the short term but gradually average out in the long term.

 

  • Risks & Returns

During index investing, the data is constantly inserted, deleted, and updated. This can cause the index to start fragmenting over time. Also, when the data is modified, the distribution keeps on changing with time. This is a huge risk and so index maintenance is very important as it helps to build proper indexes for each table.

Steps to Invest in Index Funds

The steps to invest in Index funds are mentioned below.

 

  • Pick the index you want to track

There are various indexes that you can track with the help of index funds. Conduct a detailed analysis of the market and shortlist a few that can be profitable for you.


  • Choose the correct fund

After choosing the index, search for a good index fund that can track it. There are numerous index funds that track popular indexes like S&P 500.

 

  • Open an account to buy index fund shares

In order to buy shares in the index fund you have chosen, open an account with the mutual fund company or you can also opt for opening a brokerage account with a broker.

Now you are well aware of the important factors that you must consider before you start investing in Index Funds. If you can carry out the investment in a proper way, it can be tax efficient as well as cheap.

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