Index funds are composed of the same stocks, bonds or similar securities as those included in a specific index like the Dow Jones Index or Standard & Poor's 500. Index fund managers try to duplicate the performance of the index it is based on. When deciding which index fund to buy, look at the fund's fees and performance. The nuts and bolts of buying an index fund are simple. You can open an account with the financial institution that offers the index mutual fund. Alternatively, you can go through a broker, though you'll have to pay brokerage fees on top of the fees the index fund charges.
Selecting Index Funds
Investors new to index funds typically choose a fund based on a broadly diversified index of global or U.S.-based securities, according to Bankrate.com. When choosing your index fund, focus on equity funds initially and shift money to bond index funds as you get closer to retirement. Index funds typically have low fees, but not always. Look for an index fund with a low expense ratio and no sales commissions, also known as loads. As you gain experience, you can diversify your index fund holdings by adding funds focusing on a segment of a given index or that invest based on indexes of small firms, particular industries or geographical regions. Compare the fund's earnings in past years to the performance of the index to see how well the fund management is replicating the index performance.