How to Invest in Index Funds for Beginners

Index funds offer a cost-effective, diversified investment strategy for all investors. I will help you invest in index funds and list the top five index funds in 2022.

invest in index funds
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Investing in the stock market can be a challenging, unfamiliar financial step. You have access to a wealth of information online, which can be overwhelming to sort through. I am here to help you sort through that information.

Let’s start by defining what an index fund is. An index tracks a given market’s stability and marks its performance. An index fund is a mutual fund that tracks a specific aspect of a market’s index.

Index funds offer a neat solution for investors who want to gain exposure to several financial markets with minimal time commitment and upfront investment. 

If you’re interested, stick around while I describe what makes index funds such a viable solution.

Steps to investing in Index Funds

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1. Pick an Index

There are several factors, such as fund liquidity, that you should consider when investing in index funds. I would say the four most critical aspects you should consider before outlining your portfolio are investment goals, diversification, return on investment goals, and minimums.

Short and long-term investment goals

Every investment plan and financial portfolio starts with an end goal in mind. But investing is more than putting your money into financial vehicles.

It is also about enjoying life, eliminating stress, and creating future opportunities.  To reach your goals, you must outline how aggressive your index fund strategy will be.

High-risk investments tend to have larger gains, but low-risk investments have more stable gains.  Some examples of investment goals you should factor into your financial game plan:

  • Paying for a family member’s college education can be a low-risk diversification with long-term gains that results in lifelong financial security.
  • High-yield savings accounts are relatively low-risk and yield 16 times the interest than the national average.
  • Initial Public Offerings are high-risk, high-reward.
  • Currency trading is high-risk, high-reward.

Diversification preference

You achieve diversification when you own a wide range of investments. Index funds diversify by bundling several companies into a single financial instrument.

However, there are so many types of index funds that diversification levels could differ.  A total market index fund is the most diversified index fund you could pursue.

These index funds provide exposure to 3,000-4,000 companies existing within the United States equities market. On the other hand, the S&P 500 index funds pool approximately 500 companies in the index.

ROI projections

Return on investment projections, or ROIs, are calculations of how much resources you’re going to put into a project versus how much you think you will get back.

Having a general idea of your profits will help you plan other ventures.

Minimums

If you’re buying a stock or share, there is often a minimum amount that you must purchase in order to invest.  Not all investments require minimums.

2. Select an index fund

I will go over my top five index funds and give you as much data as is available on them, including factors like the bid-ask spread.

5 Best Index Funds to Invest in 2022

I ranked these options based on historical performance, future projections, diversification, and fees.

Vanguard 500 Index (VOO)

The Vanguard 500 Index invests in stocks and holdings within the S&P 500 Index, which embodies 500 of the biggest US companies. 

For beginner investors, the fund provides exposure to a wide range of companies while offering a higher potential for long-term growth. 

There are risks associated with overall stock market fluctuations. When the country experiences an economic downturn or political instability, investors could see substantial short-term losses

There is no set bid-ask.  Investors should pursue the Vanguard 500 Index if their goal is long-term growth. As of June 2022, there is a minimum investment of $358, resulting in a 0.03% risk exposure, 0.77% less than the average similar fund.

The bid-ask is $0.72 or 0.21%, meaning this is a high-volume market investment.

VOO’s top individual companies include:

  • Apple Inc. (6.53% of the fund)
  • Microsoft Corp. (5.77% of the fund)
  • Amazon.com Inc. (2.98% of the fund)
  • Alphabet Inc. Class A (1.94% of the fund)
  • Tesla Inc. (1.80% of the fund)

In terms of sector diversification, here are its top five sectors:

  • Information Technology (27.1%)
  • Health Care (14.4%)
  • Financials (11.2%)
  • Consumer Discretionary (10.9%)
  • Communication Services (8.8%)

Vanguard Total Stock Market Index (VTSAX)

The Vanguard Total Stock Market Index Fund provides investors with access to all of the United States equity market, including large, mid, and small-cap growth and value investments. 

Because of its diversification, minimal costs, and tax benefits, this fund is a popular choice for investors.  Not only is VTSAX cost-efficient, but it also creates wide-ranging exposure to the U.S stock market, which will also come with volatility.

Many strategies include VTSAX as a sole domestic index fund or core equity.  The Vanguard Total Stock Market fund has a minimum investment of $3,000. Its expense ratio is 0.04%, 0.76% below the average of similar funds.

VTSAX also has around 4,100 stocks with a median market cap of $122.9 billion. Several of its most weighted individual companies include:

  • Apple Inc. (454.2 million shares)
  • Microsoft Corp. (219.6 million shares)
  • Amazon.com Inc. (12.7 million shares)
  • Alphabet Inc. Class A (8.7 million shares)
  • Tesla Inc. (24.2 million shares)

Top five sectors for diversification in this fund:

  • Technology (25.9% of the fund)
  • Consumer Discretionary (14% of the fund)
  • Health Care (13.4% of the fund)
  • Industrials (12.8% of the fund)
  • Financials (11.5% of the fund)

Fidelity ZERO Cap Index Fund (FNILX)

The Fidelity ZERO Cap Index Fund provides exposure to the total stock return of United States large-cap companies. The fund invests in nearly 80% of common stock large-cap assets within the firm’s U.S. Large Cap Index. 

Depending on float-adjusted market capitalization, this fund will represent 500 of the largest U.S. companies.  There is no bid, but there is a $13.47 ask.

A feature of the FNILX fund is its 0% expense ratio and minimum $0 investment. Throughout its life, the fund has produced an 11.7% return, including a 16.2% in the last 3 years. 

Ten companies make up nearly 28.8% of the portfolio:

  • Apple Inc.
  • Microsoft Corp.
  • Amazon.com Inc.
  • Tesla Inc.
  • Alphabet Inc. Class A
  • Alpha Inc. Class C
  • Nvidia Corp.
  • Berkshire Hathaway
  • Meta Platforms Inc. Class A
  • UnitedHealth Group Inc.

Top five sectors for diversification in FNILX:

  • Information Technology (28.45% of the total portfolio
  • Health Care (14.12% of the total portfolio)
  • Consumer Discretionary (11.15% of the total portfolio)
  • Financials (10.82% of the total portfolio)
  • Communication Services (8.62% of the total portfolio)

Vanguard Total International Stock Index (VTIAX)

The Vanguard Total International Stock Index Fund Admiral Shares provides a low-cost strategy aimed at emerging and developed international economies. Investors gain exposure to financial markets across the world, except in the United States.

This fund is more volatile than a domestic fund because it only targets emerging and developed markets. Investors who want to diversify their portfolios with international exposure should pursue this fund.

There is no set bid-ask.  The minimum investment for VTIAX is $3,000, including a NAV price of $28.12. Investors can expect an expense ratio of 0.11%, which is 0.80% lower than the average of comparable funds.

It has over 7,871 companies, and the biggest companies include:

  • Taiwan Semiconductor Manufacturing (313.4 million shares)
  • Nestle SA (35.9 million shares)
  • Tencent Holdings Ltd. (78.2 million shares)
  • Samsung Electronics Co. Ltd. (61.6 million shares)
  • Roche Holding AG (9.2 million shares)

For regional diversification, VTIAX’s most targeted global regions:

  • Europe (39.6% of the total fund)
  • Pacific (26.7% of the total fund)
  • Emerging Markets (25.2% of the total fund)
  • North America (7.9% of the total fund)

Vanguard High Dividend Yield ETF (VYM)

The Vanguard High Dividend Yield ETF analyzes the FTSE High Dividend Yield Index’s performance. Investors gain exposure to companies with high dividend yields, including their returns. 

VYM serves as an effective method to track these companies with historically above-average dividend yields.  It has a bid-ask of $0.29 or 0.28%.

The minimum investment for VYM is $103.47, including an expense ratio of 0.06%, which is 0.86% below the average ratio for comparable funds.

The biggest companies:

  • Johnson & Johnson (3.22% of the total fund)
  • Exxon Mobil Corp. (2.77% of the total fund)
  • JPMorgan Chase & Co. (2.64% of the total fund)
  • Procter & Gamble Co. (2.42% of the total fund)
  • Chevron Corp (2.30% of the total fund)

Here is a diversification breakdown of VYM:

  • Financials (20.1% of the total fund)
  • Health Care (14.4% of the total fund)
  • Consumer Staples (12.8% of the total fund)
  • Industrials (9.9% of the total fund)
  • Utilities (8% of the total fund)

3. Purchase shares of the fund

Now you must execute the transaction. A few simple steps to guide you through your first purchase:

  1. Decide on your firm or website of choice (Betterment, M1, Wealthfront)
  2. Create an account (you may need to provide documentation and bank account information, which could take a few days for processing)
  3. Transfer money from your bank, checking account, savings account, or external source into your new brokerage account
  4. Utilize the research tools, tips, strategies, and fund choices from this article to make your first purchase

Why Invest in Index Funds?

What are the advantages of investing in index funds? Below are key reasons why you should integrate index funds into your financial portfolio:

  • Lower fees—Many top ETFs have minimal expense ratios and $0 upfront investment.
  • Diversification—Index funds provide broad market exposure for new investors.
  • Tax benefits—Fewer trades and lower turnover in ETFs means investors usually pay less in taxes.
  • Hands-off concept—A team from the financial institution manages the fund, which means no time investment on your part. 

Next Steps

As you evaluate potential index funds, make sure to consider the following:

  • Does the fund align with your short and long-term investment goals?
  • Does the fund offer diversification you prefer?
  • Does the fund have a proven track record of performance and positive future projections?
  • Does the fund have manageable fees?
  • Does the fund have a low cost of entry?

You now have the tools to develop a sound index fund investment plan. Start your journey today by investing in any of our suggestions (VOO, VTSAX, FNILX, VYM, VTIAX).

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FAQ's

Still unsure about index funds? I’ll answer some of the most common questions retail investors ask.

What is an index fund?

An index fund is a mutual fund that purchases a bundle of stocks with similar characteristics within a specific market index.

How do index funds work?

Because index funds track a certain market index, their value and price will fluctuate in correspondence with the fund it tracks.

Can I buy index funds with $100?

Yes. There are several index funds without minimums or with minimums less than $100.

Can you lose money in an index fund?

An index fund interacts with domestic and global markets, making it semi-stable but with high variance. Political instability, market downturns, and other uncertainty can cause a short-term loss.


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