Friday, September 29, 2006

Invest in an indexed fund

An indexed fund is a large fund that is benchmarked against the market index. The fund manager's job is to make investments to follow the components of the market index. This is also called "passive investment".

The advantages of an indexed fund are:

- it is usually a very large fund
- it is well diversified
- the annual charge is very low, maybe 0.5% or less

The fund manager can keep the charges at a low level, as they do not have to pay analysts to study the individual stocks. They just invest mainly to follow the market index.

Studies over the past years have shown that, by investing in the index, the results are better than the average performance of actively managed funds. This is probably due to the low fees and transaction costs.

If you invest in an indexed fund, you do not have to worry about how to pick the right managers. This reduces another challenge.

Many experts have recommended the consumers to invest in the indexed funds.

NOTE: An indexed fund with low charges is not available in Singapore today. But, I expect it to be available in the near future. Watch out for it.
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2 comments:

The Thought of Life said...

Dear Mr. Tan,

I remember posting in your blog, urging people to forget about all ILPs and instead invest in Term+Index Fund. You responded saying that NTUC Income's ILP is different, as it's low cost. So, do you think buying NTUC Income's ILP is better or go for Term+Index Fund? If you say about cost, I think Term+Index Fund is much cheaper, even compared to NTUC Income's ILP.

September 29, 2006 9:54 PM
Tan Kin Lian said...

Dear Thought of Life

I agree with you. It is good to invest in Index + Term.

The Combined Fund + Term is also a great idea.

Although the charge is higher, the active fund managers are able to earn a higher return to cover the difference.

The Combined Fund from NTUC Income charge only 1% per annum, compared to 1.5% to 2% charged by similar funds.

September 30, 2006 10:33 PM

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