Personal Finance / Unit 4: Saving and Investing
4.5 Mutual Funds and Index Funds
Notes
A mutual fund pools money from many investors to buy a mix of stocks, bonds or both. A professional manager may choose the investments.
- An index fund aims to match a market index (a list of companies) rather than beat it. Index funds usually have low costs.
- Funds charge an expense ratio, a yearly fee shown as a percent of your money.
- Example: a 1% fee on $10,000 costs $100 a year; a 0.2% fee costs $20 a year.
- Over many years, lower fees can mean more money kept.
- One fund holds many investments, which gives built-in diversification.
Practice
What is an index fund designed to do?
Index funds aim to match an index's performance.
A fund has a 0.5% expense ratio. What is the yearly fee on $20,000?
$20000 \times 0.005 = 100$.
Fund A charges 1% and Fund B charges 0.25%. On $10,000, how much more does A cost per year?
A costs $100 and B costs $25. The difference is $75.
Ready for more? Take the Unit 4 test.