Get to know what an index fund is, an investment instrument
that can bring in cash with minimal risk and small capital.
What investment is right and provides abundant income? Maybe
it's not uncommon for these questions to be going on in your mind because of
the lack of information about investing. All types of investments are
appropriate, but that does not mean all investors will get the same results.
When talking about return or profit, do you know what an index fund is, an
investment that can bring in profit but with minimal risk?
Find out more about what an index fund is, how it works, and
popular examples here! This time, Qoala is here to specifically discuss index
mutual funds, or more commonly known as index funds.
What are Index Funds?
The first time you know of an investment asset called an
index fund? If so, does that mean you don't even know what an index fund is?
Before discussing it further, make sure that you already have an investment
goal. That way, you can be more flexible in choosing the most appropriate type
of investment instrument, including index funds or index mutual funds.
An index fund is a mutual fund instrument that is managed
with the aim of getting a return that is close to the figure that the reference
index produces. The index that you use as a reference can be a stock or bond
index. Well, the investment manager will make the composition of the mutual
funds the same as the reference index.
In index fund management, investment managers do not need to
do company analysis. Thus, the operational costs of this one investment asset
will be much lower than other types of mutual funds. Those of you who have
invested in or are currently investing in mutual funds, of course, already know
how much it costs investors to be able to invest in the assets of their choice.
The index fund market is considered broader and allows
owners to trade it at any time. Still unsure about choosing an index fund? You
can find as much information about index mutual funds as possible. One example
of an index fund that is a favorite of investors is the S&P 500. As the
name suggests, this index fund includes 500 of the largest listed companies in
the United States.
When compared to stocks, index funds have a smaller risk
value. It turns out that this is justified and believed by Warren Buffett, one
of the most successful investors in the world. So novice investors need not be
afraid and worry about spending a lot of funds for investment capital. As long
as your investment is made without mistakes, of course what you are worried
about is just a fear, not a nightmare.
It would be better to first compare some of the differences
between index vs stock mutual funds so that you are more confident about
choosing an index fund. As we all know, stocks are able to provide high
returns. However, high returns are usually commensurate with high risks as
well. So, don't be surprised if you often hear about so many investors who fail
to get profit from stocks. This means that stocks are not an investment
instrument that is suitable for everyone.
Because of this, ETFs or exchange traded funds were created,
which are instruments that collect funds from the public and then put them into
a large pot. Then, these funds are used by investment managers to be able to
develop and manage in various fields.
Buffett even wrote a book explaining that the best
investment strategy is to avoid risk as much as possible. So the chances of
achieving the goal will be greater. In investing, of course you also have to be
patient and disciplined as suggested by Buffett. This may indicate that index
funds are the goal.
History of Index Funds
What is an index fund may still confuse people who are not
familiar with the term, including you. Index funds including sharia index
mutual funds exist because ordinary people are still confused about stock
investment. That is, people still don't really know and understand what the
right investment product is. Of course, stock analysis requires time, effort,
and a long journey.
Seeing these conditions, John Bogle, the founder of the
Vanguard company, then built the first index fund in 1976. That way, people
have investment choices that don't require analysis. Not only that, potential
investors also have the opportunity to get more assets in the form of packages.
Investment costs are also lower than mutual funds in general.
Until now, index fund products continue to grow. You can
even choose the best index fund in Indonesia to increase your chances of
getting cash from the amount of money you use as investment capital.
How Index Funds Work
How do index funds work? As previously stated, mutual funds
work like their reference index. One of the things you should know about the
performance of index mutual funds is that the returns you get cannot be used to
measure whether the performance of this mutual fund is good or bad. To do this,
you have to measure the difference between the product's performance and its
reference.
In other words, the performance of index mutual funds will
be assessed as lacking even though the performance of the RD index one is
higher than the reference and has a large difference. The term that describes
the difference between the index fund and its reference is known as the
tracking error.
The smaller the difference, the better the performance of
the index fund. If the score of the tracking error is equal to zero (0), it can
be said that the index fund has perfect performance. Why is that? The value or
score indicates that the index mutual fund is exactly the same as the
reference.
Then, who takes care of index mutual funds investors? If in
investing you are familiar with the term investment manager, then he is also
the person who makes index mutual funds while creating a stock portfolio with
the best possible value.
The stock value will grow in line with the stock market
index if the portfolio is well managed. Still need another description to
understand what an index fund is and how it works?
For example, you want to buy the S&P index fund, the
investment manager will buy it. The composition is the same as the 500 issuers
on the S&P 500 index that you choose. So, this type of mutual fund will be
similar to the types of stocks on the index. At least, the index fund will not
be better or worse than the existing index on the reference stock market.
In short, index funds will increase by an increase that is
not much different from S&P stocks which increase 1 percent and vice versa.
Even if they are different, the results will not be much different. Meanwhile,
if the reference index value is fixed, the investment capital in the asset of
your choice is moving rather steadily.
Advantages of Index Funds
Are you sure to choose this investment option after understanding
what an index fund is and how it works? It's best not to rush into making
decisions because investments shouldn't be made haphazardly without sufficient
knowledge. As a beginner in the field of mutual fund investment, especially not
very familiar with the term Indonesian index fund, dig up as much information
as possible and learn how to increase the chances of getting a return on
investment.
The advantages that investors can get by choosing the best
index mutual funds are as follows:
1. Investment with Affordable Capital
Who says that investment requires large capital? In fact,
there are so many investment instruments that you can start with minimal
capital. Apparently, index funds are a suitable investment choice for
beginners. The reason is that they can start this one investment with
affordable capital.
2. Low Risk Profile
Risk is one of the things that potential investors need to
pay attention to when choosing the right type of investment. For those of you
who want to invest with a low risk profile, would you prefer index mutual funds
over other investment instruments?
Movements in index funds adjust the reference index. The low
level of risk comes from the differentiation of existing stock products in
index funds. A low risk profile is also an advantage that you can get when
investing.
So, when deciding to invest, make your choice whether you
want to get a big profit opportunity with high risk or low risk but with
comparable returns.
3. Affordable Cost
In investing, you will get to know various types of costs
including administrative costs. However, there is no need to worry about this
because index funds are known as affordable or low cost investments. In
general, investment managers charge a fee of 0.5 percent of the balance
annually.
If you are lucky, you can get a broker who offers his
services for only 0.1 percent per year. So, are you increasingly interested in
this one investment instrument?
4. Allows Investors to Easily Monitor Portfolios
The opportunity to monitor portfolios is obtained because of
transparency to investors. That way, investors can monitor the allocation of
funds they use to invest.
Let's say you choose an index fund with an IDX30 benchmark.
That means, you can see a list of stocks on the reference or benchmark. So it
is not difficult for you as an investor to find out which stocks the investment
manager has chosen for you.
Weaknesses of Index Funds
So that later you will be more confident in choosing index
vs stock mutual funds, you should also first recognize what weaknesses this
investment choice has.
Basically, there is no perfect investment instrument. That
is why investors and potential investors will be able to see some of the
weaknesses of index funds, including the following:
1. Comes with Limited Profit Potential
Before convincing yourself to invest, it is important to
know that the potential profit or return is proportional to the level of risk.
If you choose an index fund that has a low risk profile, you already know what
that means, right? Yes, the potential return that you get is also small or
limited.
This is one of the drawbacks that you should pay attention
to when sorting and choosing the best mutual fund products for the index. Even
so, you don't need to worry because a low potential will still give you the
opportunity to earn money. It's best to find out information about the amount
of return you can get from investing in index mutual funds.
2. It is an Investment Affected by Market Conditions
Even though it looks suitable as an investment instrument
for some people, especially beginners, unfortunately investment managers cannot
do much in managing these instruments.
Market conditions and general economic conditions affect the
increase or decrease in these instruments. The index fund value will increase
when the trend is increasing and vice versa.
3. Assessed Less Flexible
Another drawback of index funds is that this one investment
instrument is considered less flexible. Investment managers do not have the
flexibility to manage investor funds. This makes its performance only visible
at the beginning. Having built and designed index mutual funds as best he can,
he cannot change the portfolio composition in case of changes in market
conditions.
After knowing everything about index funds, from what index
funds are to their advantages and disadvantages, do you have an idea of what
this investment instrument is like? To complete the information you get, here
are some examples of index funds that you can choose as an investment to get
returns or cash:
1.IDX30
Did you know that the IDX30 is an index that measures the
performance of 30 large capitalization stocks? Of course, these stocks are the
best 30 of the LQ45 index which meet criteria such as liquidity value and
company fundamentals.
For those of you who are interested in idax funds, of course
you can choose one of the product samples from IDX30. Among them are the IDX30
principal index, the IDX30 BNI-AM index, and the IDX30 FWD asset equity fund
index. Approximately, which one will you choose?
2. LQ45
For those who are still confused about deciding which index fund
is right to invest in, maybe you can choose a product that uses LQ45, such as
Avrist LQ45 index, Batavia LQ45 plus, or Mandiri LQ45 index. LQ45 is a
complementary index to the JCI which measures the performance of around 45
stocks that have a high level of liquidity. Not only that, these stocks are
also stocks with large capitalization that are supported by good company
fundamentals.
3. SRI-Kehati
Sustainable and responsible investment or SRI-Kehati is an
index created by the Kehati Foundation with reference to the United States
Principles for Responsible Investment or PRI. While the publication cooperates
with the Indonesia Stock Exchange (IDX). The examples of index funds that use
SRI-Kehati are the RHB SRI-Kehati index fund and BNP Paribas SRI-Kehati.
There are also several index funds that are the choice of
investors, such as the Russell 2000 which includes 2,000 small companies that
have calmed down in the United States. Another option that is no less popular
is the FTSE 100 which contains the 100 largest listed companies in the UK.
Meanwhile, those of you who want to invest in index funds
with fewer issuers, of course, can choose DAX where there are only 30 issuers.
However, the capitalization of these issuers is relatively massive in Germany.
Understanding what an index fund is may not be easy but it
is especially important for those of you who plan to choose mutual funds as an
investment instrument. With so many choices, you can be more flexible in making
choices so that you are closer to achieving your dreams and realizing your
investment goals, such as getting as much money as possible.
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