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Index Funds

A mutual fund is a group of stocks, bonds, or cash combined in numerous ways and sold as shares. When you invest in a mutual fund, your money is combined with the money of others. For example: An Index 500 Fund holds shares of stock from 500 of the largest U.S. companies (Microsoft, Exxon, IBM, Walmart, etc...). It is designed to provide investors with a broad exposure to the large capitalization sector of the U.S. Market. Each mutual fund share contains a piece of each stock. If you own one share of a Index 500 Fund, you own a piece of all 500 companies.

Index funds come in all shapes and sizes: sector, large cap, small cap, international, etc... Indexfunds.com lists index funds in categories for you to view.

Another great reason to invest in index funds, low expenses. Many managed funds which trade in and out of stocks frequently pay a fund manager to research these stocks. Expenses and commissions can range from .18 percent (many index funds) to over 6 percent (many commission based fund companies). These percents do not look like much, but let us add the power of compounding:

*Index 500 Fund returns 13%, subtract .6% in expenses, total 12.4%. If you invested $1000 right now at 12.4% and left it for 30 years, it would be worth $33,340.

*XYZ managed fund returns 13% also, subtract 3% for expenses, total 10%. If you invested $1000 right now at 10% and left it for 30 years, it would be worth $17,450.

Absolutely amazing what a few percentage points can do over time! How can Index Funds charge so little? They are considered "unmanaged" funds. Yes, there is a fund manager and he or she monitors the stocks and money flow. With most Index Funds, the fund manager invests half of the total amount of money they are given equally among all the stocks in the index. The manager then invests the other half in, what they feel, are undervalued companies within the index, so not all index funds are the same. Managers rarely sell shares of stock within the index and they do not have to research stocks outside of the index, so fee's are low.




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