What Are Index Funds?

Index funds are collective investment schemes. That may sound sinister but they are actually known for their safety and their stability. Their purpose is to solve the age-old problems that investors in single stocks have always suffered. They seek to profit from the general upward movement of a variety of healthy stocks rather than risk everything on a single financial instrument that may rise or fall based on a number of circumstances outside the control of investors.

Instead of trying to determine which stock will bring you substantial returns, you can observe a more limited number of index funds and evaluate how well they have done by their shareholders. When you invest money in these funds, you purchase a whole basket of stocks and other financial instruments. There is a high amount of safety in these arrangements because the failure of a single stock cannot significantly damage your portfolio.

The only drawback to index funds that many traders see is the equal limitation in gains. If one stock breaks out and rises significantly in value, your possible gains are often moderated by the stability of the other stocks in the same fund. However, good management can increase the overall gains of an index fund and try to catch more winners than losers do.

The Best Index Funds

• Vanguard 500 Index Admiral — It recently gained over 4% annually.

• Fidelity Spartan Extended Market Index — A conglomeration of mid cap and small cap stocks which focuses on the largest 4,500 companies after the first 500.

• Vanguard Mid Cap Index — It only includes mid cap companies among the investments.

• Schwab S&P 500 Index — It mirrors some investments made by the Fidelity and Vanguard index funds.

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