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What are index funds?

I’m pretty new to investing and have bought some shares but I now want to put some money into an investment fund. I’ve heard about index funds but I’m not sure what they are. And are they better than non-index funds, if that’s the right term?

It’s an OK term but the opposite of an index fund manager is called an active manager. The index fund tries to match what the S&P/ASX 200 index might do while active fund managers try to beat the index. It’s called producing an 'alpha' result.

History tells us that fund managers can beat the index in shorter periods but over a five- to 10-year period and even longer, the index funds win.

There are also exchange-traded funds or ETFs, which are listed like conventional shares and can be sourced through brokers. They also give you a product that will track the stock market’s overall index performance.

That’s a pretty good start on index funds but you should put a bit of time into understanding these products. Of course, if the stock market falls, these funds will lose out but so will most active fund managers. Good luck.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, June 24, 2011

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