There’s no question that getting to know all of the index fund benefits will help you stay invested for the long-term and reinforce your mindset about investing intelligently.
After all, index funds are a no-brainer for anyone who wants to keep building wealth over the years…
They’re also the best investment vehicle for people who don’t want to spend years educating themselves about picking stocks first.
So without further ado, let’s take a look at 3 index fund benefits you will be able to reap with indexing…
1. They Outperform Mutual Funds
Yes, that’s right! Time and time again, many of those who try to beat the market with mutual funds are left behind the prudent passive investors who go with index ones. And that’s one of the major differences between index and mutual funds.
This outperformance is usually realized when looking across an extensive period of investing, though.
Mutual funds may beat the market for 2 or 3 years in a row (sometimes even longer if we’re in a bull market), but they tend to underperform index funds over the long-term. That means that it will take some time for you to realize the great returns that index funds are famous for.
You see, an index fund will basically hold your hand when it comes to investing conservatively but efficiently. But it simply cannot help you stay invested for the long-term. This will require some discipline on your part…
So, be prepared that you will face some bumps in the road, but you will be able to significantly increase your wealth in the end if you stay focused.
2. They Are Cheap to Manage
Hands down, one of the most important index fund benefits is that they charge very low fees.
Perhaps this is even the reason they tend to perform so well. Fees eat away your returns, after all.
Just take a look at the expense ratio of most funds. That’s basically the percentage of the total money invested that managers keep each year as a fee. And it can be as low as 0.02%! And rarely does it exceed 0.2%.
Now, if you compare this range to the expense ratio that most mutual funds usually charge which is between 0.5% to 1%, it becomes quite clear how cheap index funds are.
Too good to be true, though? Not at all.
You see, index funds are supposed to match the performance of a benchmark like the S&P 500 or Nasdaq Composite. This is basically a passive investment strategy that doesn’t require the resources and attention that trying to beat a benchmark does.
In other words, it’s easier to join an index than beat it. Hence, the spectacularly low fees…
3. They Are Tax-Advantageous
Now, let’s talk about taxes… Don’t be scared. You will be so glad to know this if you want to invest in an index fund.
Index funds are also cost-effective because they’re tax-efficient. A metric many who are interested in index funds must pay attention to is the turnover ratio.
The turnover ratio is the percentage of the securities a fund manager replaces in a given year.
For example, if it’s 50%, then it means that the fund manager bought and sold half of the securities they invested in within a year.
OK, how does this have anything to do with taxes?, you might ask.
You see, in most countries, gains from investing are taxed based on how long the holding period was.
Simply put, if you buy and sell a security within a year, then any return is taxed as personal income. If you buy and hold for more than a year before you sell, your return will be taxed as capital gains, which can be significantly lower; especially if you belong in a high tax bracket.
Therefore, how frequently a fund manager makes transactions has a direct impact on the taxes you pay for your returns.
Index funds are famous for a very low turnover ratio because indices don’t replace companies on a large scale and very frequently.
Index Fund Benefits: Conclusion
There are certainly plenty of good reasons to invest in an index fund.
But the 3 index fund benefits we outlined here are the most important you should keep in mind while going forward with your index approach.
To recap, index funds are great because:
- They provide greater returns than mutual ones,
- They charge low fees, and
- They are tax-efficient.
I really appreciate you reading this article and I hope it gave you all the reasons you need to start investing in index funds. If it did, please share this article with others so we can spread the word!
Also, let us know what you decided to do by commenting below… Will you invest in index funds after all or are you thinking about another strategy?
Take care for now and we’ll talk to you the next time!
Disclaimer: This information should not be viewed as financial advice. You should consult a financial advisor or do your own due diligence before you invest. The owner of this website and author of this article are not to be held liable for any undesired result by anyone who uses this information that is provided here in any way.
