‘I want to buy into an index fund, but I’m not sure where to start’

May 24, 2019
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Index funds are good way of getting exposure to the sharemarket without needing to select specific stocks. Source: Pexels.

Q. Can you please advise how to buy into an index fund and the names of a few of them worth looking at, or how I can find and compare them?

A. For the sake of brevity, I will assume in my answer that you understand how index funds work. It is important first that you are buying an index fund for the right reasons and it is an appropriate fit within your investment portfolio. I personally use index funds in my own portfolio because of the diversification benefits and the fact that actively managed funds on average do not outperform the index. Also, active funds typically charge more and take more risk.

There are a number of ways to buy an index fund. Firstly, you can acquire a managed fund (effectively a unit trust) where the manager will replicate the index you are wishing to follow. For example, you can buy index funds to follow the entire Australian sharemarket or international sharemarket or sectors of these markets. The same applies to property.

Alternatively, you can buy an exchange traded fund (ETF) which is a managed fund which trades on the stock exchange. It is similar in function to buying an individual company on the Australian sharemarket except it offers to replicate either a broad or narrower index.

In Australia, the main choice for index managed funds is Vanguard investments. Most other index managers are wholesale managers with a minimum investment can be between $100,000 and $500,000 per holding. It is possible to access other managed funds through investment platforms and in this regard, it would be useful to seek advice from a licensed financial advisor before deciding on the choice of fund and how it fits within your overall portfolio.

In relation to ETFs, there is some excellent information on the ASX website. The ASX categorise ETF’s as part of the product group exchange traded products (ETP). I suggest you read this information and seek independent advice before deciding how to proceed.

Should you decide to use index funds which follow broad indexes, there is little purpose in comparing products as they all will have primarily the same result less fees. Once you start to look at sub-indexes and more exotic products it will be imperative to obtain some advice so that you can be sure you are considering all the relevant issues including risks and costs.



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