Index funds are super popular, and a great investment option for long-term investing. Plus they’re super low cost too. It’s easy to invest in them, and the best way to invest is through a broker or investment company, all online! (we’ve got the best ones below).
Planning to invest in index funds? We’ve got you covered. They’re the main type of investment for pensions and long term investment strategies. Why? They grow along with the market, are completely hands-off, easy to buy and low cost too – perfect for those new to investing and saving for the future.
We’ll cover exactly what all of that means below.
Wait, what’s an index fund?
An index fund is a type of investment that tracks a ‘market index’. Wait, what’s a market index then?
A market index, (also called a stock market index), is something that measures a stock market itself, or a specific group of companies on a stock market, such as the largest companies on a stock market (stock exchange).
Types of indexes are (or indices! It means the same):
Countries (tracks businesses that represents a country)
Regions (tracks businesses that represent an areas of the world, such as Europe)
Global (tracks the global stock market)
Stock exchanges (tracks companies on specific stock exchanges)
Sector (tracks types of industries, such as real estate or energy)
And very popular indexes (and most popular index funds) are:
FTSE100 – this measures the largest 100 companies listed on the London Stock Exchange in the UK.
S&P 500 – this measures 500 of the largest companies in the US.
Nikkei 225 – this measures 225 large companies on the Tokyo Stock Exchange in Japan.
DAX – this measures 40 large German companies on the Frankfurt Stock Exchange in Germany.
NIFTY 50 – this measures the 50 largest Indian companies listed on the National Stock Exchange in india.
By the way, index funds are also called tracker funds (as they track an index/the market).
There’s even ethical stock market indexes
Yep! You can even invest in indexes that track ethical companies. That’s companies not damaging the environment or people’s health, so no tobacco companies, nuclear weapons, fossil fuels, and companies that must have positive attitudes to human rights and things like that – just generally doing good in the world. One popular one in the UK is the ‘FTSE4Good’ index. We’re big fans of these here at Nuts About Money!
By the way, you can even get an ethical ISA – which are investment accounts that will invest in ethical companies for you, easy-peasy! And it’s all tax-free.
Index funds explained
Going back to index funds. What they do is simply track these indexes. As simple as that. They only track the companies within the index, and are not ‘actively managed’, which is where the investment experts are buying and selling investments to try and make more money. Index funds just track the index.
This means they’re cheaper than regular investment funds as there’s not much work needed to track indexes, so the ‘operating expenses’ are lower, and often investments within the index don’t tend to change regularly, so lower trading fees too.
And, they’re often seen as lower risk than regular investment funds – as they tend to have a broader range of investments (so more investments within the fund), which means they’re often more diversified (your money is spread out across investments or industries).
More importantly, as most index funds tend to track the ‘market’, they are often seen as the best investment for long-term growth – as the market will outperform every investment strategy over the long term (according to investment theory). Which is why they’re often part of personal pensions (here's our best private pension UK).
So, a quick recap, index funds are:
An easy way to invest
Low risk (Not zero risk, but definitely low.)
And they tend to offer great long-term returns too. They’re so good, even Warren Buffet (the most successful investor in the world) recommends them as the best choice for most people.
Want to buy Index funds?
Check out InvestEngine, it's fee free! And a huge range of funds.
Index funds are passive rather than active, being ‘passive’ means that they are not selected by a human being who buys and sells according to how the market is performing. Rather, they are automatically chosen based on the selection criteria of the index they follow (like the largest 100 companies listed on the London Stock Exchange). Which is why they’re also called tracker funds.
Well, we say it’s automatic, there is an index fund manager behind the scenes actually doing the work, but they won’t be making the decisions – just doing the paperwork. Because of this, they have much lower management fees and trading costs.
Actively managed funds
An actively managed fund simply means a human is deciding which investments to make – they are actively managing it. Of course, not just any old person! An expert in investing and investment management – they’ll know their industry inside-out, such as clean energy if they were running a clean energy investment fund.
The aim of an active fund is often to beat a comparable index fund, which is called ‘beating the market’. Why? Well index funds track the market (such as the UK stock market), so it acts as a baseline to compare against.
Investment fund managers can demonstrate good performance if they are beating the market – they’ve made good decisions and are making the investors in the fund more money than if they were simply just investing in the market itself, and can justify the higher fees. But, let’s face it, there’s a lot of luck involved too!
A lot of active funds do not beat the market, so don’t be fooled into thinking that humans are better! Often the best strategy is to invest in a passive index fund and benefit from lower costs too.
By the way, you’ll see the management fees that all funds charge on something called the key investor information document (KIID) – which is a brief summary of the fund, what it’s investing in and how it’s performed in the past.
So do index funds sound interesting? Great! Now how do you actually do this thing?
Exchange-traded funds (ETFs)
Now you know the types of funds, index or active, you might be wondering, what’s that other type of fund everyone is talking about, an ETF?
ETFs, or exchange-traded funds, are not a different type of fund itself, but they’re funds that trade on a stock market, just like shares in a company. You can buy and sell (trade) shares in an investment fund via a stock broker such as an investment app. Pretty cool right?
Index funds and actively managed funds can both also be ETFs, and most of them are! It’s a much easier way to buy and sell, and means anyone can buy them.
There are types of funds which are private, and not listed on stock exchanges, and the most popular type is a hedge fund – which invests in pretty much anything they want, and take more risk, but only available to a limited number of people who invest privately.
How to invest in index funds
Think index funds are a good option for you? Awesome. So where do you even start? Don’t worry, it’s easy. Here’s our step-by-step guide.
1. Choose which investment account to use
By investment account we mean, do you want to invest through your pension, or maybe a Stocks & Shares ISA, or maybe a Stocks & Share Lifetime ISA, or even a Junior ISA?
If you’re not sure what any of these are, don’t panic. Here’s our guides to each:
The cheapest place to buy index funds is InvestEngine – it’s actually completely free! They only handle investment funds (called ETFs) however – luckily that’s exactly what index funds are. Here’s our InvestEngine review and the InvestEngine website¹.
Cheapest (ETFs only)
InvestEngine is great for investing in exchange-traded funds (ETFs), and that’s all they do. It’s a cheap way to invest your money, in fact the only cost you’ll pay is the fund fee. There’s no InvestEngine fees!
The app is great to track your investments too.
Get £25 for free when you sign up with Nuts About Money.
Time to find the investments! Most investment platforms will show you a huge list of investment funds you can invest in – there’s lots out there.
All you need to do is find one that suits your investment strategy (which is hopefully hands-off long term investing!), and find index funds to suit you. You’ll be able to search for funds on the brokers website.
Let’s say you wanted to invest in the FTSE 100 index fund – that’s the largest 100 companies in the UK (on the London Stock Exchange).
You’ll find a few options if you search for ‘FTSE’, and 2 very popular ones are:
iShares FTSE 100 (Acc)
iShares Core FTSE 100 (Dist)
iShares are a super popular provider of ETFs (exchange-traded funds), which are investment funds that trade on stock exchanges – exactly what you’re after.
iShares are actually managed by BlackRock, the famous, massive investment firm. There’s also Vanguard, another popular provider of ETFs.
When browsing, you’ll notice the (Acc) and (Dist) after the fund names. This just means Accumulating or Distributing.
Accumulating or distributing what you ask? Well, the income from owning shares in the companies within the funds – often large, successful companies will pay ‘dividends’ to their shareholders, which are essentially the profits the company makes being given to its shareholders.
Accumulating funds add this income back into the fund, reinvest and buy more shares in the businesses within the fund – meaning you can benefit from compound interest, which is your interest making more interest over time – the best way of making money in the long term. Whereas distributing funds will give you the income you get from owning the shares as cash to do with as you like.
3. Buy, buy, buy
Now you’re ready to buy! It’s a big step for some, but a great decision for your future. Once you’re ready, all you need to do is add your money and hit buy on the investment company’s app or website. As simple as that. Congrats! You’re now an investor in index funds!
And that’s how to invest in index funds
Index funds are awesome for long-term investing, and you probably won’t beat returns from index funds that track stock markets. They’re easy to buy and often very low cost. What’s not to love about them?
Pretty simple really isn’t it? Buying index funds is easy with the right investment company, such as InvestEngine¹, or our other best investment platforms. The hardest bit is deciding which index fund(s) is the best for you. The FTSE 100 and S&P 500 are always good options, and very popular choices.
Well, what are you waiting for? Get investing!
Want to buy Index funds?
Check out InvestEngine, it's fee free! And a huge range of funds.
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