One of the most popular investment funds today is the Standard & Poor’s 500 index fund (S&P 500). The S&P 500 index, which serves as the benchmark for the index fund, lists stocks from companies with the largest market capitalization in the United States. And an S&P 500 index fund imitates the performance of the stocks listed in the index rather than outperforming them.
However, investment in a passively managed fund isn’t necessarily straightforward. For sound investment, you need to know a few important details about S&P 500 Index Funds. A list of those details has been compiled below to give you a head start.
Invest in an S&P 500 index fund like a pro:
- Choose the fund wisely
You must know what you’re looking for. While investing in such a fund isn’t challenging, choosing the right fund can be a bit complex. That being said, whichever fund you choose, you’ll find the same stocks and weightings as on the index.
Now, there are a few things to take note of:
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- Sales load: In a mutual fund, the fund manager often charges what is called a sales load. In simpler terms, it is her sales commission. Steer clear of these funds. This is especially important, considering the fund is only passively managed.
- Expense ratio: Those who have been investing for a while would know the expense ratio’s role. The lower the expense ratio, the more inexpensive the fund. An expense ratio, FYI, is the cost of managing the fund over a period of time.
- Inception date: The longer the index fund has been in the market, the more reliable it is. You must see how the fund has tolerated the incidents of bear markets over time.
- The minimum investment amount: You must know that different index funds have different minimum investment requirements.
- What kind of companies are we talking about
As noted earlier, the primary S&P 500 index tracks the stocks of the companies with the largest market capitalization in the US. However, there’s a lot more about these companies than this.
To name a few, all these companies are US companies, maintain an unadjusted market cap of a minimum of $12.7 billion, and have reported positive earnings in four consecutive quarters.
- Don’t over-do it
Yes, S&P 500 Index Fund invests in stocks of large-cap companies with well-established reputations. But, you should note that the S&P 500 index is in itself disproportionately diverse, with a majority of the stocks from the IT sector.
If you want to invest smartly, you should not rely too much on S&P 500 index funds. Explore other options, such as small-cap, mid-caps, and international stocks. The more distributed your funds are, the more cushioning you’ll have in dire market conditions.
- Don’t time the market with an S&P index fund
You’ll often hear from people that you should time the market. But, there isn’t a fail-proof formula that determines when the market conditions will stabilize.
Usually, when people time the market, they dump their money in one go. Now, there’s no way to tell whether the stock price will continue to rise or suffer a fall. If it falls, the loss is significant. Understand that S&P Index Funds cannot necessarily beat the market.
On the other hand, it is advised to apply the dollar-cost averaging technique while investing in an S&P 500 index fund. In this, you spread your investment over time instead of injecting it into the market in one go. This way, you’ll average your purchase prices and weather market volatility better.
- What are a few good S&P 500 index funds?
Well, you’ll have to research, but let’s enumerate some well-known funds.
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- Fidelity ZERO Large Cap Index
- Vanguard S&P 500 ETF
- iShares Core S&P 500 ETF
- Vanguard Russell 2000 ETF
- Shelton NASDAQ-100 Index Direct
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