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Introduction to Choosing an Index Fund

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To determine which index fund is right for you, look at which index a fund follows, the tax effects of the fund, and the costs.

What you will learn

  • Know Which Index the Index Fund Follows
  • Know the Tax Effects of Index Funds
  • Know the Costs of Index Funds

What do you know?

Introduction to Choosing an Index Fund

Index funds make low-maintenance investments. You don’t need to worry about a manager changing his/her strategy: because index funds rigorously track specific indexes, the manager doesn’t have much say in the matter. Don’t fear that your manager will leave for greener pastures, either: index-fund managers aren’t actively selecting stocks, so it doesn’t matter much who is calling the shots. Finally, asset growth isn’t an issue: because indexing is a relatively low-turnover approach, index funds don’t suffer under the weight of too many assets.

Choosing an index fund isn’t such a snap, though. More than 1700 index funds ply their trade in more than 25 different investment categories. To complicate matters, some investment categories (such as large-blend) have multiple index funds, many of them locked to a different benchmark. It’s getting so you can’t tell the players without a program.

To simplify the process of choosing an index fund that meets your needs, consider the following suggestions.