The primary reason for investing is for the sake of the future, and this future may be long-term or short-term. An index fund is focused mainly on the former. While it might not yield lavish returns as your other investment choices, it is quite a reliable and cheap way to prepare for the future, especially for retirement. Here are some good reasons why index funds are a good investment option.
It’s Relatively Cheap
Index funds work for all categories of people, you don’t necessarily need to be earning a fat cheque to invest in index funds, compared to other mutual funds which will require a lot of management fee from your brokerage, due to its simplicity, index fund requires less work and in turn, lesser fees.
It’s Tax Efficient
While other actively managed funds may attract a lot of taxation, from the frequent sales of a holding which sums up the frequent taxation on those sales which in turn affects everyone who owns shares of the fund. On the other hand, index funds don’t trade investments as often as the former. In a case where some new influx of cash is introduced, they could pick the stocks in such a way that it generally reduces the Capital Gain Tax.
It Automatically Diversifies Portfolio
When investing in index funds, you won’t need to be bothered about picking shares to diversify your portfolio because that would be taken care of already and automatically, and this helps you save the time of researching individual investments as well as doing self-medication by managing your own portfolio. Asides being cost-effective, I consider this advantage to be the second-best when it comes to the choice of index funds because it eliminates a lot of excuses why your investment may not yield returns. For example, In your regular mutual funds, while considering your portfolio, you could be biased while choosing the right stocks, maybe because you experienced some losses previously, or you might not want to take a particular risk which may be a good one in the long run. While these may seem like good causes to be considered while choosing your portfolio, it also will cost you in making decisions that could be based on the fear of losing money, which leads you into making hasty decisions when there are shifts in the market.
Minimal Risks
Unlike other types of mutual funds and generally other investment options, index funds have minimal risk, and it gives you Total Returns on your investment. The advantage of total returns is one that is peculiar to index funds which gives it an edge over the other types of mutual funds.
Finally, if you’re in the category of people that wouldn’t want to know the details of the rise and fall in the market and you just want to get your returns, while you take the wait, then index funds may be your preference. Index funds are quite a good run for your money, and you must remember that it requires patience to indulge in this type of investment.
PS: While choosing your index funds, always compare their expense ratios, because as much as index funds are cheaper than other mutual funds, some index funds tend to be cheaper than others.
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