Most investors use index stock funds because they’re simple to use, hands-off, highly diversified, and low-cost. As a result, index funds attract many investors looking to make straightforward financial gains from the stock market. 

Investors make their index funds up with stocks that mirror the performance of the market index, such as the S&P 500, which is perhaps the most popular example. As index funds are passively managed with lower fees than managed funds, they often generate higher returns. 

• The S&P Index gave investors an annual return of 18.4 percent in 2020
• Warren Buffet suggested the index fund is the best investment the average American person can make 
• The S&P 500 has a market cap of $414 billion, the largest market cap in the world 

However, where do investors start? The process of buying index funds is simple, and here’s how you do it!

1) Pick Which Index You Want 

Firstly, you need to pick which index you want. The S&P 500 is the most popular example as it contains 500 high-performing companies. The index contains some of America’s best-known companies, including businesses from a vast range of industries. 

But there are various index funds based on the following things:

• Company Size and Market Cap – There are index funds tracking small-cap companies, medium-cap companies, and large-cap companies. 
• Geography – There are index funds focusing on companies from different nations, or even a combination of international exchanges
• Asset Type – There are index funds monitoring domestic and foreign bonds, cash, and commodities
• Market Opportunities – Some index funds focus on emerging markets with hidden potential
• Business Sector or Industry – You can find index funds based on various industries, such as technology, healthcare, and telecommunications. 

It’s an excellent idea to diversify your investment portfolio. That’s because you’ll mitigate risk, increase the likelihood of making a profit, and avoid losing all your investment if one industry tanks. The travel industry crash during the COVID-19 pandemic is a prime example.

2) Select Your Index Funds

Once you’ve chosen your perfect index, you need to select your index fund. Most times, the cost is the most important factor. A significant benefit of an index fund is the low cost. They’re cheap to run because they’re automated. 

However, some index funds contain administration costs. The bigger the fund, the lower the fees. Here are some things to consider:

• Investment minimum 
• Account minimum 
• Expense ratio 
• Tax-cost ratio 

Once you’ve fully considered these points, you can move on to the next step. 

3) Decide Where to Buy 

The most popular way to buy an index fund is via a mutual fund company or a brokerage. When you’re choosing where to buy an index fund, you should consider the following things:

• Fund Selection – Would you prefer buying index funds through various fund families? Although the big companies carry competitors’ funds, the selection can be more limited than a discount broker’s lineup. 
• Trading Costs – If the provider doesn’t waive the commission or transaction fee, you should consider how much the provider charges to buy or sell the index fund 
• Commission-free Options – Does the provider offer commission-free EFTs? And do they offer no-transaction-fee mutual funds? You need to consider both. 
• Convenience – You should find a provider who’ll accommodate all your requirements. For example, if you’re looking to only invest in mutual funds, you could perhaps choose a mutual fund company. 

Best S&P 500 Index Funds With Low Costs for Winter 2021

1. Vanguard S&P 500 Index Fund – Admiral Shares (VFIAX)
2. Schwab S&P 500 Index Fund (SWPPX)
3. Fidelity Zero-Large-Cap Index (FNILX)
4. Fidelity S&P 500 Index Fund (FXAIX)

Two Other Important Things to Consider 

1) Is the Index Fund You Want Too Costly? 

If you feel the index fund you want to purchase is too costly, you could invest in an exchange-traded fund that will track the index. Instead of having to buy the full mutual fund, you’ll buy a small part of the fund. 

2) Is the Index Fund Doing a Good Job?

Your index fund must reflect the performance of the underlying index. Look at the index fund’s returns over several time intervals. You shouldn’t panic if the returns aren’t identical because that’s not always likely. But if the fund’s performance lags the index considerably, you have a major red flag. 

Frequently Asked Questions 

• What are the Best Index Funds? 

Here are some of the best index funds to invest in as 2022 approaches:

• The Fidelity S&P 500 Index Fund (FXAIX)
• The Fidelity Zero-Large-Cap Index (FNILX)
• The Schwab S&P 500 Index Fund (SWPPX)

Nonetheless, you need to consider your personal circumstances, your risk level, and your existing investments before picking one. 

• Could You Lose Money in an Index Fund?

It’s always possible to lose money in index funds. However, if you hold the index fund over the long term, you’re far less likely to lose money. 

• Should I Buy an Index Fund Now? 

The COVID-19 pandemic has created uncertainty around investing. However, it’s always better to invest sooner rather than later, as you’ll maximize your chances of obtaining excellent long-term investment results.

Final Thoughts 

Index funds are a generally safe, reliable, and productive way for investors to passively make financial gains from the stock market. It’s important to diversify your portfolio, and select a risk level comfortable for you. However, if you invest wisely, an index fund is one of the best long-term options available. 

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