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How do you buy index funds?

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Quick Answer

When selecting index funds, look for one that tracks the broad stock market and charges a low expense fee, say Johnathan Clements from The Wall Street Journal and Nellie S. Huang from Kiplinger's Personal Finance. Index funds help investors avoid the high compounded costs charged by actively managed funds.

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Full Answer

Choose from index funds that are cap-weighted and equal-weighted, states John Jacobs from Forbes. Each type of index fund has its advantages, and an investor should examine his risk appetite and the potential for gain before making a choice. Market cap-weighted funds are less volatile and suited for those who want to reduce their risk, while equal-weighted funds are better for those who have the capacity to risk their capital looking for better returns.

An investor should also diversify his portfolio; he can choose from bond funds, funds with developed international markets or funds that track the U.S. stock market, states Clements. While the two funds that track the stock market help increase returns, the bond fund helps minimize losses. An index fund investment strategy with a portfolio that tracks various stock market indices ensures long-term profits at lower risks and at lower costs as the fund management expenses are minimal.

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