What are index funds?

What are index funds?

The index funds They are used to track the behavior of stock market indices or a fixed income index. They help to balance the existing risk in an investor's portfolio, since market fluctuations tend to be less volatile. 

In short, not to forget what is an index fund You should know that they are collective investment institutions that maintain an investment policy that tries to beat a reference index: replicate an index and flow with it. The person who saves has the possibility of investing in the set of values that make up the index without having to worry about buying the values individually in the same proportion.

Index fund: what it is and characteristics

This is an indirect way of buying in the stock market. A index fund buy the stocks that make up the entire index and are available across a wide variety of asset classes. 

The operation of a index investment fund It is the same as that of any other fund in which a management company is in charge of buying and selling assets to achieve a return, but assuming a certain risk. Those who are participants can redeem the shares for the value they have on the day of the operation or subscribe them.

main index fund characteristics:

• They do not focus on just one type of asset.
•  They are versatile, because they offer the investor diversity regarding the asset class.
• By investing in index funds, all the securities contained in the respective reference index are bought.
• They are not listed on the stock exchange, and their price is normally set once a day.

Types of index funds:

There are different types of index investment funds, which are defined by the replication techniques they use for the indices.

Physical replica:

Those who buy stocks or bonds of the index they want to replicate.

Synthetic replica:

They use financial derivatives, that is, there are no assets that can replicate that index fund, but there are contracts that support them.

Sampling Replication:

The manager buys a representative sample of the index components, so the financial adviser tries to reduce the tracking error below that of the competitors. A good tracking would be less than 0.5%.

Tips for Investing in Index Funds

We offer you some tips to get the most out of your capital if you decide to invest in index funds: 

• You must have an investment portfolio and diversify it geographically to minimize risks. It is difficult to know which countries will perform better in the future, so it is advisable not to focus on a single country.
• Choose the most suitable stock index. You can combine regional funds or even make a global fund, which is quite beneficial.
• Identify the scope of the fund and to what extent it replicates the chosen index. The more reliable it is from scratch, the greater the reliability of the fund.
• Protect yourself against possible scenarios of low stock market, it is recommended that investments are not made for long periods of time.

Differences between index mutual funds and exchange traded funds

Although it may seem that the index investment funds and the listed ones are the same, due to the replica of a reference index, the truth is that there is a big difference. The index fund holdings they are bought by net asset value, through the management entity, while exchange-traded funds are traded as if they were shares in secondary securities markets.

If you want more information, do not hesitate to consult Fazil, where you will find the blog with more information.