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Sunday, October 26, 2008

Index Mutual Funds

From The Hoss's Mouth

Index mutual funds are a favorite of Hoss Cents Free Financial Money Magazine. In fact most money magazines will recommend index mutual funds to both the novice and experienced investor.

index mutual funds
Index mutual funds reflect the performance of the index market they represent. This could be a bond market index or stock market index such as Dow Jones or Nasdaq, or in Canada the Toronto Stock Exchange (TSE) or Venture Exchange.

Numerous studies comparing actively managed mutual funds with index mutual funds have consistently shown the index mutual fund as having the best performance.

How is this possible? Index mutual funds are managed to mirror the performance of a published index . It is a relatively simple matter to develop a computer model that tracks a particular index and recommends adjustments in an index fund to match the index it is tracking.

Generally speaking actively managed mutual funds are required to make more trades than index funds and therefore incur higher trading costs. In addition actively manged mutual funds have higher research costs than do index funds. All of these extra costs incurred by an actively traded mutual fund reduce the profits of that fund. Not to mention that market timing is not an exact science and often produces losses rather than gains.

Diversification is the key to financial success and investing in index mutual funds enables you to maintain your portfolio balance with relative ease. Lets say you are a conservative investor with a portfolio balance of 70% fixed income (bond, money market index) and 30% in equities(Dow Jones or other equity index). Interest rates tumble and as a result your fixed income is now 60% of your Portfolio and equities are 40%. It is a simple matter for you to sell some of your equity index fund and purchase more fixed income index fund to obtain your original 70-30 balance. In addition if you hold these index mutual funds within the same fund company you may be able to switch the balance without cost and in some cases the fund company will set up a periodic automatic rebalance at no charge to you.

I am sure you can now understand why index mutual funds are a favorite of Hoss Cents Free Financial Money Magazine. The recent heavy decline in all market index's provides a buying opportunity. Remember buy low, sell high.

Stay on track,

The Hoss

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