What is an index fund? How does the index fund work? The following small series will tell you.
The meaning of index fund
Index fund, as its name implies, is a fund that invests in index stocks, that is, by buying some or all of the stocks contained in an index, the investment portfolio of index fund is constructed, with the purpose of making the change trend of this investment portfolio consistent with the index, so as to obtain roughly the same rate of return as the index. Index fund is a kind of fund with the principle of fitting the target index and tracking the change of the target index to realize the synchronous growth with the market. The investment of index funds adopts the investment strategy of fitting the target index return rate, and invests in the constituent stocks of the target index in a diversified way, so that the stock portfolio return rate fits the average return rate of the capital market represented by the target index. Index fund refers to the operation of the fund, according to the proportion of constituent stocks in the selected index (such as the Standard & Poor's 500 Index in the United States, the Nikkei 225 Index in Japan, the weighted stock price index in Taiwan Province, etc.). ), and choose the same asset allocation model to invest, in order to obtain the income synchronized with the market.
What is the operation process of index funds?
The investment management process of index funds mainly includes constructing the initial investment portfolio of index funds, reinvesting cash dividends, adjusting securities weights and monitoring fund performance.
1. Build the initial portfolio. After determining the tracked
After the market index, the fund manager will buy securities in the market according to the tracking index method adopted to construct the initial portfolio of the fund.
2. Reinvestment of cash dividend income. Once the initial position is established, one of the main tasks of the fund manager is to reinvest the cash dividends obtained by the fund from listed companies in time. Theoretically, the fund manager should distribute the cash dividends received to the securities in the index in proportion every day. However, this method is too expensive. The realistic approach is to reinvest the received cash dividends (and other cash income, such as cash received by open-end funds from new shareholders) on a regular basis, for example, for one month.
3. Adjustment of securities weights. Once the weight of securities in the tracking market index changes, the index fund must also make corresponding adjustments in time to ensure the consistency between the fund and the index. Most market indexes will be adjusted regularly, and some securities that no longer meet the selected index standards will be eliminated and replaced by other securities that meet the standards better. In addition, even those stocks that have not been adjusted may have their weights changed. For example, a listed company may place new shares and other companies may buy back some shares. Generally speaking, these changes are not very frequent in mature capital markets, but they are very frequent in emerging capital markets, so the corresponding adjustments made by index funds must be paid attention to.
4. In order to make the investment performance of index funds consistent with the tracked market index, fund managers need to regularly evaluate the accuracy of fund tracking market index. Generally speaking, no fund's performance will be completely consistent with the market index it tracks, and many reasons, such as transaction costs, restrictions on the number of scattered stocks (the number of stocks bought must be an integer multiple of 100 shares), will lead to a certain deviation between the performance of index funds and the market index. Fund managers should monitor this deviation and ensure that it remains within a certain range. If there is abnormal deviation, the fund manager should analyze the problem and take corresponding measures.
In most cases, after the index fund is put into operation, the main task is to repeat the above process to ensure that the index fund is consistent with the market index. Standard index funds do not advocate predicting the running direction of the market index, so they always hold the combination of the market index for a long time and get the investment income equivalent to the index.