Hassle Free Investing.
So you ask how do I keep up with the market ?. This is where the S&P 500 Index Mutual fund comes into play. In this article we will dissect what S&P 500 is, what mutual fund is and what an index mutual fund is, and how you go about picking the right fund for you.
What is S&P 500
The S&P 500 Index, also known as the Standard & Poor’s 500 or the US500, is an American stock market index that tracks the performance of the top 500 companies listed on the Nasdaq Stock Market or the New York Stock Exchange. It is a free-floating index covering US firms with the largest market capitalization and book value, representing approximately 80 per cent of the total value of the country’s equity market.
Officially created in 1957 by financial companies Standard and Poor’s, the index is now owned by the S&P Dow Jones Indices, a joint venture between S&P Financial (formerly known as McGraw Hill Financial), global markets company CME Group and media company News Corp., which owns Dow Jones.
The S&P only uses free-floating shares when calculating market cap, meaning the shares that the public can trade. The S&P adjusts each company's market cap to compensate for new share issues or company mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor. The divisor is proprietary information of the S&P and is not released to the public
As of this writing the Top 20 companies that constitutes S&P 500 are
Apple : 6.99%
Microsoft : 5.63%
Amazon : 3.32%
Tesla : 1.96%
Alphabet Class A : 1.93%
Alphabet Class C : 1.71%
Berkshire Hathaway Class B: 1.59%
UnitedHealth Group : 1.54%
Johnson & Johnson : 1.39%
Exxon Mobil : 1.36%
JPMorgan Chase : 1.01%
Meta Class A: 1.01%
Visa Class A : 0.98%
Procter & Gamble: 0.97%
NVIDIA : 0.96%
Home Depot : 0.96%
Chevron Corporation : 0.93%
Eli Lilly : 0.84%
Mastercard Inc. Class A: 0.82%
AbbVie Inc : 0.81%
What is a mutual fund
Now that we know what constitutes S&P 500 index tracker, let's look at what a mutual fund is
A mutual fund is a pool of money provided by individual investors, companies, and other organizations, and is one of the easiest and least stressful ways to invest in the market.1 A fund manager is hired to invest the cash the investors have contributed, and the fund manager's goal depends on the type of fund; a fixed-income fund manager, for example, would strive to provide the highest yield at the lowest risk. A long-term growth manager, on the other hand, should attempt to beat the Dow Jones Industrial Average or the S&P 500 in a fiscal year, although very few funds achieve this.
In other words, it’s a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
There are different types of mutual funds. Some of the types are :
Actively managed funds : These are funds with portfolio managers that select investments that seek to outperform a benchmark.
Index funds : These are funds where managers aim to mimic a specific index, replicating its holdings and performance.
Equity funds: These funds invest in U.S. or foreign stocks
Fixed income funds: These funds buy investments that pay a fixed rate of return, like government bonds and investment grade corporate bonds.
Asset allocation funds: These funds will allocate a specific amount to fixed income and equities depending on the fund's goal.
Benefits of investing in S&P 500 Index Fund
Before investing in S&P 500, you should know all the expected benefits and risks involved.
Benefits
- Better Returns
- Low Expense Ratio
- Ideal for long-term returns
- Good for diversification
- They are ideal for passive investing
Risks
- There’s a lack of flexibility
- They are vulnerable to market crashes and changes
- Limited gains
- They have no human element
- You won’t own all the assets you want
- There’s no loss protection
Why Should You Invest In Index Funds?
Index investing is ideal if you want to build wealth. These funds are low cost and require you to only match the results from the financial markets over long periods. In the long term, these funds could help with your retirement plan. And better yet, you don’t have to be a stocks expert to trade in these funds.
So why should you go for this investment? Here are some reasons.
1. The Investment Is Less Risky
The indexes have diverse stock options from major companies. This diversification is ideal because it protects you from suffering a significant loss if the one company winds up or goes bankrupt. It’s hard to lose everything once you have invested in these funds, unlike other types of investments.
2. You Don’t Need To Spend A Lot Of Time
For most trades, especially in the stock market, you have to research the performance of individual stocks to ensure you don’t lose your money. However, with an index fund like S&P 500, you can rely on the knowledge of a fund company or a manager to guide you on how and which index to trade in.
3. They Are Less Expensive
Compared to actively managed funds, trading costs for index funds are less costly. The index fund manager doesn’t have to incur a lot of costs and commissions when handling your invested cash. In addition, their role is to track and match the benchmarking index, which translates to fewer management fees. If you want to spend less, this is the best alternative for you.
4. Diverse Portfolio Of Investments
When trading in index funds, you can buy stocks and bonds from a variety of companies. For instance, S&P 500 covers 500 firms, which is ideal for investors. However, you also have an option to choose index funds that focus on particular financial markets. All in all, compared to other stock market investment options, index funds are broadly diversified.
5. You Pay Less Taxes
When you compare index funds to other types of asset trades in the stock market, they are quite tax-efficient. Because they are passively managed, there is reduced buying and selling. As a result, your holdings don’t generate capital gains which get added to your tax bill. This is a strategy you can use to avoid the fund's expenses.
As you can see, the best way to keep up with the market is the use of Index S&P 500 Index Mutual Funds. These have very low expenses, and are offered at almost all brokerage houses or via the brokerage arm of your local bank, and most of them will allow you to start with as low a minimum investment as $0-$50. So what are you waiting for?.
