Basic guide of index fund investing

A piece of financial literacy, which the EF Education First helps students understand in preparation for the exams, is the concept of index funds. These are funds whose portfolio is set by the simple but difficult-to-obtain composition rules of an index, which could be the broad market index of S&P 500, or an ETF tracking the S&P 500 index of stocks.

One of the most common index funds is a Vanguard S&P 500 ETF , which is the world’s first ETF on the stock market. Its total assets as of Dec. 31, 2017, was US$430 billion.

The reason for such popularity of the fund is that the composition of this fund is based on the most important companies of the American stock market. As a result, investors know which companies have the highest revenue growth and the highest efficiency ratio.

If you are still not convinced about this fund, you should take note of the fact that Vanguard is the world’s largest ETF provider. The total assets of its flagship index fund, the Vanguard 500 Index Fund , account for 45 percent of all assets invested in ETFs around the world.

ETFs are the perfect investment tools for families

Thanks to the ETF craze, family investment, which for a long time was limited to the small unit size, can now also reach a significant sum of money. The total assets of family investment funds as of Dec. 31, 2017, were US$77 billion. The interest of individual investors in this type of funds is confirmed by the fact that the assets invested in these funds for clients in 2017 increased by 6.5 times compared to 2006.

With a key effect of making large portions of the family investment funds invested in large technology companies, money invested in family investment funds is expected to increase further in the coming years.

One of the most promising new channels for family investment funds is the fund of funds. This is a fund that invests on behalf of the family, and in a different way, the investor. First of all, there is the flexibility. With this tool, a family may choose the kind of investments desired by the different members of the family.

For example, a family may choose to invest in bond funds or stock funds for the children, while the spouse invests in more sophisticated instruments such as commodities funds for the elderly.

Another significant advantage of the fund of funds is the fact that it has all the features of a mutual fund but with additional advantages such as tax-free investment. For instance, if a family decides to invest in a mutual fund for a decade, and then decides to buy a product of a fund of funds, the owner of the fund of funds can enjoy tax exemption. It may also be possible to manage the family investment funds through the funds of funds.