LA Wealth Management

 

Understanding Index Fund

By Saghir Aslam
Rawalpindi, Pakistan

 

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

Funds that track the market may have lower costs.

But are they always the best option?

Every business day, the media reports what happened in the financial markets. Was the standard poor or the Dow Jones industrial average up or down for the day? Did the RUSSELL 2000 which measures US stocks strengthen or weaken?

While those numbers tell you something about the financial markets, they don’t necessarily tell you how your portfolio performed. After all, the S&P 500 which has 500 companies in it, doesn’t necessarily represent your individual portfolio.

For most individual investors, accumulating share of all the companies in the right proportions to match the S&P 500 is prohibitively expensive. Or at least it was, until the mid-1970s when a new investment vehicle first appeared.

“Index funds came along and tried to fill that void, almost tried to democratize investing; the way most people should think about index funds is as broad, passive, cheap vehicles.”

Index Funds

Index funds are a form of passive management, where the funds replicate the performance of a specific index of investments. One of the primary strategic advantages of index funds is that they typically have low operating expenses. This is the opposite of active management, where a portfolio manager tries to pick selected equities or investment vehicles that will outperform during a specific period.

Index funds got their start in the mid-1970s, as mutual funds companies realized that for most investors, buying shares of everything in the S&P 500 was cost-prohibitive. As more people invested in these index funds, managers developed funds for additional indices.

“What an index funds allows you to do is maintain a dynamic allocation that evolves over time as the economy evolves.” – Continued next week

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. MrAslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds, or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)