By: Ji Kaifan

If you look at the United States published by the investment fund, the book will usually recommend a novice investors buy index funds such as the Vanguard 500-index fund.

By definition, the index fund is tracking a particular stock index, such as the Shanghai index. The types of funds in accordance with the basic index of the development of methods to configure securities held varieties and proportions, is a completely passive funds. How adjusted index, the Fund on how adjustments. Clearly, the proportion rose, the net value of the Fund will mean the number rose.

Investment of the index funds four benefits

First, index funds tend to have very good results scattered investment, particularly large index tracking funds. For example, earlier said the vanguard 500 Index Fund, the United States is tracking the S&P 500 index. The index of America’s 500 largest listed companies have become across all industries.

Secondly, because it is completely simulated index, the index change in how the fund on how the change, it is a passive fund. Performance and fund managers on the market judgment, and therefore it is not concerned about who the fund managers.

Third, as an index of relatively stable, the stock churning not frequent, significant savings in transaction costs, will greatly reduce management costs. For example, Vanguard 500, the management fee is only 0.18%, while the average large American equity fund balance of about 1.02%, with many index funds at 0.5% -1.0%, and general equity funds is 1.5%. Do not belittle that point differential, the growth of interest, long time can be exceedingly.

Fourth, its and the law of the market is there. That is the so-called market is not effective, or that the market is not the right. The simple conclusion is that if the market is efficient, we can not expect any one time fund managers can transcend large. But it is a long-term investment, selection index fund is the best option.

But this theory is controversial, and the great investor Warren Buffett says : If the market is efficient, then he will penniless. Buffett, Lynch these masters are opposed to this theory. But for a normal person, not masters level, or perhaps recognition of this theory is better, particularly in the United States market. It is said that the United States can outperform the broad market for less than half of the fund managers. But for the Chinese market, I think from a very effective market also far outperform the market is very large is possible.

Two meaning of the index funds

Index funds are obviously two meanings : 1, the index; 2, the fund.

Copyright Fund China 2009.

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