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Index funds: The easy way to benefit from the performance of the market

by , 26 June 2015

When it comes to investing in funds, you have a choice.

You either opt for actively managed funds, which have a fund manager trying to outperform his chosen benchmark.

Or you can opt for a passively managed fund, in other words an index fund. This type of fund mirrors the make-up and performance of its chosen benchmark.

The advantage of passively managed funds is you don't have to pay for a fund manager's expertise that may not yield results.

Let's take a closer look…


The advantage of index funds


Index funds simply mirror the overall performance of a particular asset class, such as South African stocks or government bonds.

On the other hand, actively managed funds try to pick the best stocks, but there’s no guarantee they’ll outperform the market, especially over the longer term.

That’s why one of the easiest ways to benefit from the performance of the market is to invest in index funds. You can do this either through exchange traded funds (ETFs) or unit trusts.

ETFs trade just like shares, so you’ll have to use the services of a stock broker to buy them. Unit trusts you can access via your financial advisor, bank or fund management company.

Index funds can make good long-term investments. Historically, share prices rise and this means you should make money over the years investing in these funds. They’re also an easy way to gain diversification.


Gearing up your returns from index funds using CFDs


If you opt for ETFs, you can also gear up your potential returns by trading contracts for difference (CFDs) on the index fund.

By trading on margin, you can multiply the moves of the index. Gearing also multiplies your losses so you need to bear the risks in mind when and understand them thoroughly before trading.

You can also short indexes. So if the market was falling, you could potentially profit from this move lower.

Shorting index funds using CFDs gives you a way to hedge your current portfolio when the market is heading lower. The gains from your CFD trade would offset the losses in your investment portfolio.

So there you have it. The easy way to benefit from the performance of the market.

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Index funds: The easy way to benefit from the performance of the market
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