What are Index Mutual Funds?
ANSWER Index mutual funds buy stocks that mirror recognized performance benchmarks. The indices weight the effect of each stock by the number of shares outstanding and the market value of each share. The well-recognized indexes that we use include the S&P 500 Index (large capitalization stocks), the S&P Mid Cap 400 (mid capitalization stocks), and the CRSP Micro Cap 9-10 Index.
Index mutual funds are stock market investing tools that seek to match the investment returns of a certain group of stocks, called an index. Index mutual funds own only the stocks that make up the corresponding index, and they carry lower annual expenses than other types of mutual funds. The fund owns the stocks in proportion to the weight of each stock to the index. Different indexes usually track a particular business segment of the stock market, such as financial institutions or European-based companies. Some indexes track a large segment of the market, such as the 500 largest companies, or even the market as a whole. A mutual fund is a collection of stocks that the fund owns. An investment house sets up the mutual fund and sells shares in the fund to individual investors. Mutual funds simplify the chore of investing in a diversified collection of stocks for individual investors. Rather than trying to buy dozens of stocks to diversify an investment portfolio, an individual investor
Index mutual funds are so-called “passively managed funds.” The term is to contrast it to mutual funds which are “actively managed.” • In an actively managed fund, the fund manager researches and selects each individual stock or bond that the fund invests in. The objective is to find and invest in securities that will outperform other securities, so that the mutual fund will outperform other mutual funds in its class, and outperform the index. • With an index fund, instead of trying to locate individual stocks or bonds that will outperform others, the manager invests in securities that mirror an index, which is a statistical measure of how certain groups of stocks are performing. For example, an S&P 500 index fund will buy each of the 500 stocks in the Standard & Poor’s 500 Index — and the stocks will be bought in proportions that duplicate the relative market weightings in the index. The intent is to have a fund that matches the performance of the index.
