Index Funds

John C. Bogle, from the vanguard investment funds and creator of the vanguard 500 index fund, is to whom is commonly attributed the paternity of the index investments. In relation with the theory of an efficient market, the thesis of Bogle is that the gross profits obtained collectively by the investors should be equal to those obtained by the whole security market, and that the net profits of the group composed by all the investors (after being subtracted the costs of consulting and others) will be less than the benefits of the whole market in an amount equal to the expenses incurred. If we believe in the historic statistic data, it seems that the theory of an efficient market has been correctly stated.

A fund that is managed passively (as is the index fund) has for a goal to equal the profitability of those securities comprehend in a determined index. In difference with the active management, that buys and sells seeking to overcome the market, the passive management just limits itself to acquire all the securities that form part of the index or of a representative number of them.

With the vanguard 500-index fund at the top, this segment has reached a representation of more than 23% of the funds that operate in the present, covering many indexes, some of them not so well known, as are the DOW 30, S & P 500 and NASDAQ 100.

The benefits from a passive management of funds are the following:

• The relative easiness to predict, due that the profitability of the fund by a general rule reflects itself on that of the index, or course, after subtracting the functioning costs;
• Fiscal advantages, because index portfolios don’t rotate as frequently, their managers are not required to buy or sell frequently and, for it, they usually don’t distribute many gins and sometimes none at all; this is why there is little fiscal pressure on the participants; and
• Low costs, due that the burdens for managing the index funds are lower; this is due to, that not being active funds the brokerage and transaction fees are lesser than those of actively managed funds.

Beginner Money Investing The Funds That Are More Convenient For You The Pros and Cons of Mutual Funds Index Funds Disadvantages of Passive Funds Management