Index funds, what are their advantages and disadvantages?

The decision of the European Central Bank (ECB) to lower the price of money and leave it at 0% has encouraged the flow of savings is transferred from deposits to investment funds. It is one of the strategies that investors have to make their assets profitable. As a result of this trend in the money world, new products are emerging to boost your profit margins. In this regard, one of the newest models is index funds.

It is a product that is exclusively linked to equities, but under very special and strict conditions. Its main initiative is that it directly replicates the behavior of a stock index, whatever it may be. It can be the Ibex 35, Dax, CAC 40, FTSE 100 or any other of the international markets. The great contribution of this indexed investment model is that It will collect the same rise or fall of the contracted index.. No variation, as is the case with traditional equity mutual funds. Not surprisingly, these tend to show slight deviations from their benchmark asset. Either because they are open to other types of investments, or because their percentage is not the real one.

Thus, if, as an example, the selective reference index of the Spanish Stock Exchange rises by 2%, the index fund would charge the same percentage. Neither more nor less, 2%. While in the case of investment funds based on this index, they would approximate this result, but without presenting the same digits. This is the main difference that this financial instrument offers to savers. Its true contribution is that it behaves as if the savings were invested directly in the bag. Without financial intermediaries as in the rest of investment funds.

It replicates the evolution of an index.

There are many benefits that indices bring to small investors. The first of them to know at all times how their investment portfolio is evolving. At the same time, they are not dependent on other financial assets. With the additional advantage that they can opt for the financial market most suitable at all times based on your profile. With the sole condition of selecting a single stock index. It is not based on stocks or equity sectors that can provide a distorted picture of what the actual behavior of stocks is.

Another contribution of this unique investment model is that it generally has commissions for its administration and maintenance. much more competitive than through other products with similar characteristics. To the point that savings compared to classic investment funds can reach 1% for this concept. Without generating any additional expense when hiring it, or when it expires.

Disadvantages in hiring

Despite everything, not all are benefits in your hiring. They present shades that should be assessed before formalizing them. The little presence of these products in the supply of banks is the main one. As a result of this situation, savers often have to go to investment managers who have them in their portfolios. Another problem that can be found is that they do not have the desired stock index, and the client has to subscribe another that they did not have initially. The plurality in its offer is not exactly one of its most pronounced characteristics.

It does not happen as in the sale of shares on the stock market, in which a better (or worse) behavior than the market can be generated. In indexing this is not feasible in any way. They will make or lose money directly with the evolution of the financial markets. In addition, you must be very careful when formalizing them, since in some cases they offer a minimum period of permanence. This means that the savings may not be available for a time. To meet the investor's personal expenses: children's school, tax obligations or any debt with third parties. Nor are partial or total refunds possible., as on the other hand happens with conventional investment funds.

Exposed to greater risks

As they are not linked to other financial assets, they are prevented from facing periods of greater instability in the equity markets. As a result of this particularity of the indexed, the investors who have taken positions are more unprotected in the face of bearish scenarios of the stock market, big falls or even a collapse of the markets. Therefore, it is not very appropriate to subscribe for excessively long periods of stay. But on the contrary, to take advantage of the expansive moments of equities.

They constitute one of the strategies to integrate into the passive management of the investment. Its only objective is to replicate a financial asset, in this circumstance through a specific stock index. Where index funds are one of the highest representatives of another way of investing savings. Neither better nor worse than other options, but it will depend on the profile that the investor presents at all times. You will have to choose whether to opt for the active or passive administration. Whatever the case, no return on invested capital will be guaranteed. Specifically, during this year, the Ibex 35 index fund has the same losses as this general index of the Spanish Stock Exchange.

10 keys to select indexed

Of course, the average investor has many reasons to select this financial instrument as a champion in their investment strategy. Some of great forcefulness, and others open to a broader debate. Whatever the case, the pronouncements that opt for this class of funds are supported by the following considerations that we provide below. You should keep them in mind from now on.

1. It is an investment model that is more novel and tries to adapt to the new needs of small and medium investors. Under substantially different hiring approaches. Both in substance and in form.
2. Its investment model, despite following a more advanced line of action, is based on very classic premises in its preparation. Pick up the trend in equities at full intensity. Both in one sense and another. As simple as that.
3. Does not allow speculation, nor abnormal movements are the behavior of the equity markets on which these financial instruments focus. They faithfully reflect the stock status of each session.
4. They do not admit any deviation in the stock indices, since they are an exact and fixed photograph in the quotes of these indices. Of course, much more than stock-based mutual funds that trade under traditional standards.
5. In this type of investment, you do not open positions in one value or another. But on the contrary, you decide to invest your money in a stock market group from different areas of the international geography. Even though not all are available from your bank or financial intermediary.
6. You will not be more calm in your investment, but at least you will know at all times what are the financial assets where your savings are stored. With a simpler and easier monitoring. Above other more sophisticated savings models than this one.
7. The spanish bag it is well covered by these mutual funds. Not surprisingly, more and more management companies have decided to create formats with these special characteristics. Some of them are available to the financial organizations themselves to market to their main clients.
8. They don't assume that you no additional monetary expense. Rather, they will require the same commissions and administration expenses as in the other savings models represented by mutual funds based on equity markets.
9. They are much simpler to understand than the rest. To the point that you just have to know the quotes of the stock indices to show what the real evolution of your savings is. In a few minutes you will know and even with the slightest deviation in their prices.
10. It will not mean taking greater risks. It will be the same as through the other investment funds. Regarding equity markets. On the other hand, any type of profile that you develop as an average investor is valid. From the most aggressive to the most conservative.

Some doubts that it presents

In addition, there are a series of doubts that these financial instruments harbor. They are equally valuable for you to see if they truly meet your expectations as a user in these kinds of financial models. From the following considerations.

• They are definitely not established in the banking sector. With the absence of many of them. To the point that it can take you a long time to find them with these conditions. The offer, therefore, is significantly lower than its proposals.
• They are funds for a profile of very well defined client. You know what you want and you like to diversify your investments in any of the scenarios that may arise from the beginning.
• While they are more easy to understand, their models may not be well known to all small and medium investors. With formats that are very similar to each other that do not help to show tangible differences between them.
• Right now, the supply of index funds is quite scarce. With certain problems so that you can hire them from now on. It should not be surprising that their commercialization is not as dynamic as that of national products.