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Tuesday, September 18, 2012

Why you Should Consider Buying Index Funds Instead of Stocks

Index funds investment is often referred to as a passive investment. Funds invested do not need an active management like other funds. There are many reasons as to why an investor may opt for one particular form of investment as opposed to another. However, if you are considering investing and is torn between investing in Stocks and buying Index funds, below are a few reasons why you should  consider buying index funds instead of stocks.
Lower costs of investment
Analysis of historical data is just enough to make you as an investor realize that to get the best out of an investment, you should minimize costs. Buying an Index fund is a convenient way to lower these costs. A good choice in this case is a passive index fund investment; the active stock investment is quite costly.
Buying stocks require a great deal of research, this results in a a higher turnover. Indexed funds have low turnover which means reduced brokerage and trading fees unlike in stocks. The limited research costs and lower trading fee associated with indexed funds is one good reason you should buy an index fund. In the long run, this lowers the cost of investment translating to a higher ROI.
Lower risks involved
Buying index funds sounds a safer investment, because your portfolio can be invested in different companies. This will translate into translation a well-diversified portfolio of your stocks. You can invest in ten companies or have your stock portfolio investment spread in several in thousands of other companies from the ten companies. This provides an investor a chance to diversify risks associated with single stocks by constructing your investment from index funds. In overall, buying index funds lower the overall risks of your investment portfolio.
Lower tax base
Index funds have lower turnover compared to stocks and other mutual funds. This passive investment buys and sells within the portfolio than actively managed stock funds. Because of the lower turnover, index funds attract lower tax rates. This is accrued to the long term distribution of capital gains and minimized distribution of capital.
Additional bonuses
With index funds, you will understand what you own; you will know exactly what your investing manager is investing in unlike an active stock. This will earn you a lot of bonuses

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