What is The Best Index Fund

If you had to choose just one index fund to invest in – what would it be?  We cut through the clutter and give you the bottom line on What is the best Index Mutual Fund.

There are generally two categories of funds – actively managed and Index funds.

What does Actively Managed Mean?

Actively managed funds are managed by a fund manager, which is sometimes composed of a team of managers, who buy and sell the underlying investments after doing extensive research and analysis.  They typically buy and sell funds more frequently than the more passive index funds.  As you might imagine, these funds are typically more costly because you will be paying more for all the salaries of these individuals as well as brokerage fees for all the investments that the fund will be buying and selling (In the brokerage world, you pay for every transaction)

Okay then, What is an Index Fund?  And which one is the Best?

An index fund typically tries to replicate some type of underlying set of investments or index.  The most well-known index is perhaps the S&P 500, which is an index consisting of the 500 biggest companies in the U.S.  These companies represent over 90% of the value of all companies in the U.S.  Thus, by investing in this index, you are betting on nearly all the companies of the US or pretty much the entire American economy.

There are a slew of mutual funds that try to replicate  the performance of the S&P 500 by buying a little bit of all 500 companies.  The biggest and most popular of these funds is the Vanguard S&P 500 Index Fund.

Which one is the best?  Well, in my opinion, the best one is the one with the lowest cost.  Why?  Because since any S&P 500 index fund will be buying the same stocks, you can pretty much bet that if all things were equal, all these index funds would have the same performance.

But alas, this is NOT the case.  Why do some index funds perform better than others?  Well, in one word, it’s due to different COSTS.  The Vanguard S&P 500 Index funds happens to have one of the lowest costs around because the company is extremely efficient.

So there you have it.

BOTTOM LINE

The S&P 500 Index is a good place to invest as a core holding in your portfolio.  And for my money the Vanguard S&P 500 Index Mutual Fund is the best one around for overall efficiency, cost and value.  You will not go wrong in choosing this fine mutual fund.

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