Index funds adopt passive investment, choose an index as the imitation object, and buy all or part of the securities in the securities market included in the index according to the standard of the index in order to obtain the same income level as the index.
Characteristics of index funds The characteristics of index funds are critical in the following aspects:
(1) Low cost Due to passive investment, the fund management fee is generally low, and the average management fee of American market index funds is about 0.18%-0.30%; At the same time, due to the holding strategy of index funds, they do not exchange shares frequently, and the transaction commission and other expenses are far lower than those of active management funds. This difference sometimes reaches 1%-3%. Although this is a small number in absolute value, the long-term cumulative result will have a great impact on the fund's income because of the compound interest effect.
(2) Decentralization and crisis prevention On the one hand, because index funds are widely decentralized, the fluctuation of any single stock will not affect the overall performance of index funds, thus dispersing the crisis. On the other hand, because the indexes pegged by index funds generally have a long history to track, the crisis of index funds can be predicted to some extent. In addition, the investment strategy of passively tracking index stocks can also effectively reduce the unsystematic crisis and the moral crisis of fund managers.
(3) Delayed tax payment Because index funds adopt the strategy of buying and holding, the turnover rate of the stocks they hold is very low. Only when a stock is removed from the index, or when investors demand to redeem their investments, index funds will sell their stocks and realize some capital gains. In this way, the capital gains tax paid every year is very small, and with the compound interest effect, delaying tax payment will bring many benefits to investors, especially after years of accumulation.
(4) Less monitoring Because index funds do not need to make active investment decisions, fund managers basically do not need to monitor the performance of funds. The urgent task of index fund managers is to monitor the changes of corresponding indexes to ensure that the composition of index funds is suitable for them, so as to achieve the goal of "making money after earning indexes".