Research Paper On Index Vs Mutual Funds

Essay, Research Paper

Thesis: There are good and bad aspects of both Index and Mutual Funds, however whichever one is better for any particular person depends on his/her situation and willingness to wait certain times, or pay certain fee s.

Whether money is be the root cause of evil or not, I don t know. What I do know it that since the dawn of man, the concept of currency had been intimately intertwined with human society. It helps form the basis of governments, and most laws. The world stock market is where these global force that powers our atomic age society merges into a complex matrix of financial void; opportunity in it s most complex form. The raw power of the stock market that can either bring a man to rapid success, or completely ruin him. Two of the prominent worlds of the stock market are the topic for this research paper: Index Funds and regular mutual funds. To my horror, these two terms are incredibly vague words and each have many different parts with their own specific characteristics. I will be comparing and contrasting the over shared characteristics of both kinds of stock market investing. Let us begin by explaining what both these terms actually mean.

INDEX FUNDS

Indexing, in its simplest form, means buying all of the stocks, bonds or other instrument of a market, or asset class, instead of trying to pick winners and losers. Index investors are content with the average performance of a market. When they invest, they buy all an amount of all the stocks within the index with the knowledge that some individual stocks will gain and some will lose. The hope and assumption is when investing in index funds, that the overall net change of all the stocks in the index average out to a gain. This is usually the case as the normal trend for a market is to gradually climb. Index investors are skeptical that on average a money manager can improve on the average performance without raising risk. They are even more skeptical after fees are subtracted.

The best known index, the Standard & Poor’s 500 (S&P 500), is a collection of the top 500 major US stocks. However there are dozens of others, including the Euro Top 100, the largest European stocks; EAFE, a broad global index of companies from numerous countries; and the Lehman Brothers Aggregate Bond Index, a collection of government and commercial bonds.

Other names for index investing include “asset class investing” and “passive investing. As the name suggests, passive investing is basically a no brainier. The philosophy is not to worry about what individual stocks will gain or lose but to place your risks on the market as a whole. An asset class is simply a category of investment, such as stocks or bonds.

THE PROS OF INDEXING

No surprises You instantly know whether your gaining or losing as your profits are based on the overall conditions of the market, or at least the section of the market you invested in. With an actively managed mutual fund investment, you may not know until the very end that the fund manager just lost you or gained you a great deal of free money.

Low maintenance No thinking required. In this sense its kinda like a slot machine just on a much larger scale and on a slot machine you never win. There is no debating over which stocks to buy, for how long to keep them. Your money stays put; you always know where it is unlike mutual funds where its always being shuffled around.

Low Taxes Taxes on distributions among shareholders is significantly less with index funds as opposed to mutual funds. This saves time and money.

Low Expenses Stock managers charge money. The better they are, the more they charge which boils down to the more you make, the more is taken out of you profit. The average general stock fund takes 1.5% of your assets each year for expenses. Some funds charge much more. The average index fund charges only 0.46%, which means more of your money, is left behind.

Lower risk As you invest in an index, your stocks are generalized throughout the market. This diversification holds a lower risk then picking out individual stocks yourself.

THE CONS OF INDEXING

Average returns – Investing in an index fund means you’ll never beat the market. You’ll never even match it, since fund expenses will knock a little off your returns. And even though most actively managed mutual funds don’t beat the market over time, a few managers have consistently posted outstanding performances.

No downside protection – Mutual fund managers often increase their holdings of bonds and cash if they think the market is poised to fall. Index funds offer no such safeguards: If the market plunges, you’ll go down with it. That’s why most financial planners say index funds are best suited for long-term investors who can ride out dips in the market.

High minimums While index funds generally have low expenses, you may need a lot of money to get started. For example the Vanguard fund requires an initial investment of $3,000 to go into one of its popular index funds; other funds require $1,000 to $5,000. And once you’re in, it might be expensive to get out: Many index funds charge a fee to investors who don’t hold onto their shares at least a year, or more.

No fun Like I said, it s a no-brainer. Which means you sit and watch your money travel up and down a little red line on you

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