Ultimate Guide On The 6 Basic Types Of Index Funds

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With index funds gaining momentum in the investment market, it is wisest to try and understand the basic types. With the help of indexfonder.org, here’s an easy guide you can follow as you learn how investing in them can benefit you as an investor. 

Where To “Buy” 

Before anything else, the first step you should do is to learn the best “where” of buying an index fund. You can choose between making your purchase through an index fund provider (a.k.a. mutual fund company), or DIY-it via your personal brokerage account. 

As for the first, you may find that there are some which operate as mutual insurance companies as well as others that solely focus on mutual funds, stocks and trading, and the like. 

6 Basic Index Fund Types

1. Broad Market Fund 

This type of fund holds a portfolio that is very closely matched with an underlying index, and monitors it to the letter. Broad market funds have the objective of seizing large portions of the market itself. Bonds, strokes, and similar security belong to this category. 

2. Term-Based Bonds 

Investors who operate within a fixed income are benefited with term-based bonds because these are tied into asset allocation. Such bonds are ones that have the same “issue” and the same maturity dates. What this conveys is that the maturity of term-based bonds take place within a specific future timeline. What’s more, the face value of the bond itself is expected to be repaid to the very bondholder on the previously allocated date. 

3. International Index Funds 

If you’re thinking about broadening your investment exposure, international index funds are the way to go. One misconception about international index funds is that they are divided according to geographical territories. However, this isn’t the case. At least, not always. 

Emerging and/or frontier markets can be utilised for index-tracking. And these do not necessarily follow the bounds that geography places upon the regions they belong to. 

4. Market Capitalization Index Funds 

Market-cap indexes are indicated by market capitalization. Market capitalization is the term used to describe the value of a company’s shares which are traded publicly, and as a whole. Though smaller companies are not excluded from its scope, market-cap indexes see more profit with big-fish enterprises. The risk is less, when it comes to well-established firms and/or corporations. 

5. Municipal Bond Index Funds 

When speaking of bonds linked to tax-free income, municipal bond funds are it. And to reduce the likelihood of too-big risks, assets are dispersed across different sectors, and even different states. 

Since these funds are generally exempt from federal taxes (and possibly local taxes, if investors reside in the same state where the bond is released), many benefit from it, especially in the aspect of diversifying portfolios. 

6. Earnings-Based Index Funds 

There are two categories under earnings-based index funds according to the earnings of enterprises--- value index and growth index. 

Value index funds consist of “value stocks”. The latter typically have a lower price in comparison to the earnings of a variety of value-measures. Though with growth index funds, rates which are much lower than average are not quick to rise when prices do, market declines do not drastically pull down their value.

By Lyle MacLeod

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