How to invest in index funds?
Because the index can't be invested directly, the index fund takes the component securities contained in the index as the investment object, that is to say, it builds a portfolio by buying all or part of the sample securities of the index. For example, the Shanghai and Shenzhen 300 Index Fund takes 300 stocks as the index sample as the investment target of the fund, that is, the fund has invested in these 300 stocks.
Index funds generally aim at closely tracking the underlying index and minimizing the tracking error in order to obtain roughly the same rate of return as the underlying index, so investors often call index funds passive funds.
What are the classifications of index funds?
According to the different trading mechanisms, index funds can be divided into open-end index funds, closed-end index funds, index ETFs, index LOF and so on.
Among them, open-end index funds cannot be traded in the secondary market; Closed-end index funds cannot be purchased and redeemed; Index ETF can be traded in the secondary market, but it must be in the form of portfolio securities when purchasing or redeeming; LOF index can also be traded in the secondary market, but it needs cash redemption.
According to the different ways of tracking the underlying index, index funds can be divided into fully replicated index funds and enhanced index funds.
Fully replicated index funds use the securities components and weights in the benchmark index to complete the investment allocation of the fund, which minimizes the above tracking error. In addition to this configuration operation, the enhanced index fund will spare some funds for other investments as much as possible to track the index and obtain higher returns.