An index fund looks to track the performance of a stock market index such as the NASDAQ 100 or the Russell 5000. Generally, a straightforward index fund will generate returns almost identical to the index it emulates. Buying shares in an index mutual fund does not differ at all from buying shares in any other type of fund. You should be aware of several points, however, as you go through the process of investing in an index fund.
1. Decide the type of index fund you would like to invest in. All types of index funds exist, ranging from straightforward offerings that mimic returns of common indexes such as the Dow Jones Industrial Average to more unique indexes that focus on particular business sectors or regions of the world.
2. Contact the financial institution you would like to use to purchase shares in your desired index fund. If you go through your brokerage, you might have to pay a transaction fee, however, some brokerages offer funds from certain fund families without a charge. In some cases, you can go directly through the mutual fund company that manages the fund. In this case, you typically will not pay transaction fees to trade.
3. Schedule your investment. Mutual funds do not trade in real time like stocks or exchanged-traded funds. Therefore, your brokerage or mutual fund company places your order and fills it at the fund's closing price on the following trading day. You can elect to make a one-time purchase. You can also purchase shares on multiple occasions. Many brokerages and fund families allow for periodic and automatic investments so that you can buy shares on a weekly, monthly, quarterly or other set schedule.
- Read the index mutual funds prospectus you are considering carefully. Some index funds look to double or triple the performance of the index they track. For instance, a 2X index fund will generally rise 10 percent on a day when the tracking index returns 5 percent. This works in reverse, however, meaning when an index is down 5 percent, a 2X index fund will be down roughly 10 percent.
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