All mutual funds, together with index funds, have expense ratios, or annual charges you pay for proudly owning the fund. That is often a proportion of your belongings, so when you’ve got $100 invested within the fund and it has a 1% expense ratio, you will pay $1 that 12 months. A 1% expense ratio might not sound that dangerous, however it may get expensive, particularly as you get an increasing number of cash invested within the fund.
Index funds typically have expense ratios properly beneath 1%, whereas some actively managed funds can have expense ratios of two% or extra. So even in a situation the place an index fund and an actively managed mutual fund see the identical price of return in a given 12 months, the index fund wins since you’re paying much less to personal it.
4. Sturdy efficiency
Index funds have their ups and downs similar to some other funding, however typically they outperform many actively managed mutual funds. In 2008, Warren Buffett made a $1 million guess that an S&P 500 index fund might outperform 5 of the hedge fund business’s greatest actively managed mutual funds over 10 years. He gained. However he wasn’t at all times main the entire approach.
With any funding, it’s a must to be prepared to just accept some danger and belief that over the lengthy haul, you are going to develop your wealth. Whereas the previous is not an indicator of future efficiency, it may be reassuring, particularly to new buyers, to know that lots of the market indexes the index funds are based mostly on have trended upward over time.