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How Do I Choose the Best Equity Index Fund?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 31 August 2016
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To choose the best equity index fund, you might begin by deciding the type of stocks you prefer to buy. The risk and return expectations for equity investments differ based on the category under which the securities are grouped. Evaluating historical performance is also essential in uncovering the most ideal equity index fund. You can get a sense of what to expect and also identify any areas of concern, such as if there is a great amount of volatility in the fund. Most index funds are priced reasonably in comparison with actively managed funds, but you should still seek to find the most attractive pricing structure.

Unlike actively managed funds, the stocks in an equity index fund do not change often. Instead, an index portfolio is aligned similarly to some other market barometer and both funds trade in much the same way. Given that investment performance in similarly constructed index funds does not tend to vary dramatically, you may want to select the portfolio managed by the firm with the most reasonable fees. Some equity fund managers require some minimum investment so select the one that is most conducive to the size of the allocation that you intend to make.

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Performance is still important, however, and to understand what kind of profits to expect from an equity index fund it helps to view past returns. A fund manager should be able to provide some illustration of historical performance or you can use an online financial website with the tools to generate a list of past returns. If the index fund demonstrates extreme price fluctuations over short periods of time, it may be a cause of concern and you should explore the driving forces behind the volatility.

It is helpful to invest in an industry in which you have some understanding. There are equity index funds that are made up of stocks from a single industry. By pursuing this route, you are investing in companies with business models that you comprehend. This may help you in determining what market and economic factors are likely to influence a particular equity index fund in a positive or negative manner, which can affect the way that you invest over different business cycles.

There are also broader equity index funds that may give you wider exposure to the stock market in comparison with portfolios dedicated to a single industry. Broad index investments provide diversification, which can be beneficial, as well. A money manager should describe the approach to a given fund in portfolio documents, such as regulatory filings, and typically you can learn about the strategy, risks, and likely rewards in certain funds by obtaining this public information on the Internet.

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