Index Funds

If you have taken the decision to invest capital in a portfolio mutual funds, then you ought to be aware that there are various types of mutual funds.

The standard investment company fund will leave the choice of stocks and shares to the discretion of the investment manager and you, as the investor, have no contribution into the decision of where your money goes. This is a passive investment.

If you would like to have a more active role in the choice of investments, but do not have the time or information to take the necessary decisions, you should look into the alternative of index funds.

Index funds are an attractive variant on traditional, managed funds in that you can tell the investment management of your particular fund, which general region of the global market that you want to invest in.

For example, the asset manager of a broad-spectrum mutual fund will invest wherever in the world the manager of that fund thinks fit, but with index funds, you can specify areas like the Pacific Basin or Alternative Energy stocks.

This allows you, the investor, the opportunity to narrow the field of investment if you have a hunch that money is moving in a definite direction, but do not have enough information to take charge of your investments yourself.

With some of these index funds, you can stipulate that they track an index as well. In our example, the tracking fund would invest in proportion to, say, the top 50 stocks in our given sector, say, the Pacific Basin.

Index tracking funds give power to the investor who has a gut feeling, but who does not have the time or even perhaps the ability to track investments in a chosen field. The down side is that some of these index funds are expensive to be in. On the other hand, these actively managed mutual funds frequently outperform the targets of the investment industry.

There is a reason for this extra expense in some kinds of funds but not in others. For instance, if you go into a general performance fund dealing only in green companies, there will almost certainly be loads of investors with you; but if you stipulate Chinese green products, you might be practically on your own and so charges for the fund manager's time will rise.

This is simple to understand, but can get quite difficult to put up with, unless you choose your niche market well Herein lies the key of opting for index tracking funds - you are trying niche markets that you believe that you understand.

Many of these index tracking funds are no-load funds, so you have to take that into account before arriving at your decision to invest or not.

Index funds are best suited to those who read the papers and who pride themselves that they have an notion about what is going on in the markets, although they do not know the nitty-gritty of which company does what and where.

This does not mean, however, that index funds are passive financial products - all investment vehicles need reviewing at least once a year. Instead, if you 'bet' on the Pacific Basin and your investment pays off (or not), you might want to swap to a different sphere of interest at a later date.

Owen Jones, the writer of this piece, writes on a variety of topics, but is now involved with Index Mutual Funds. If you would like to know more, please go to our web site at Mutual Funds.