What is an index fund and why should I invest in one?

Many people don’t like to invest because they can’t figure out exactly what they should invest in! One of the easiest and best choices for investing is with an index fund. I’ll explain:

What an index fund is.
Why you should invest in one.
What you should look for when choosing an index fund.

What is an index fund?

You’ve likely heard of market indexes, such as the S&P 500 or the Dow Jones industrial average. But you may not be sure what they are exactly. In layperson’s terms, an index is designed to track the performance of a group of stocks, bonds or other investments.

The purpose of an index fund is to replicate the returns of a specific market index. This is done by putting together an exchange-traded fund (ETF) or mutual fund that contains fractional shares of all the investments a particular index comprises.

Why should I invest in an index fund?

These are two of the top reasons you should invest in an index fund:

Index funds tend to be low-cost and aren’t actively managed, so you aren’t paying for an involved fund manager. They also don’t have recurring transaction costs because you (or a manager) aren’t constantly picking individual stocks.
Index funds enable investors to benefit from the long-term growth of a specific market. Markets generally have a solid return over time, and investing in an index fund is a great way to benefit from this!

What should I look for when choosing an index fund?

These are the top things you should look for when you choose an index fund:

Check that your index fund has a low management-expense ratio (MER). This is one of the main fees you’ll pay for your investment, so it’s essential to ensure you aren’t paying a high MER.
That they come at a reasonable price. While you don’t want something at a rock-bottom price (as that may indicate the fund isn’t doing too well), you also want to be able to afford shares of the fund without breaking the bank!
That the index fund pays you a dividend. This dividend could be monthly, quarterly or semi-annual. You can either cash out your dividends and use them as an income stream or reinvest them to help your investments continue to grow.