An index fund is a meticulous collection of stocks or other investments that aims to copy the performance of a well-known market group, like the S&P 500. These groups consist of companies or financial assets that reflect a section of the market. Some large ones give insight into how the economy is doing overall. Here are the best ways to invest in index funds.
How to Invest in Index Funds
Getting started with index funds is simple. Here’s how you can do it:
1. Decide What You Want to Achieve
Before putting your money into index funds, think about your financial goals. If you need a short-term place to store money while earning some interest, options like savings accounts, deposit certificates, or money market funds might be better.
However, if you’re looking to grow your money over a long period, such as for retirement, index funds can be a great choice.
2. Look Into Your Options
Once you’ve decided which market index you want to follow, the next step is to check out the index funds available. There are a few things to think about when making your choice:
- Company size. Some funds focus on small, medium, or large businesses. These are often called small-, mid-, or large-cap funds.
- Location. Some funds invest in companies from other countries or a mix of international markets.
- Industry. You can choose funds that focus on areas like technology, healthcare, or everyday consumer products.
- Type of investment. Some funds track bonds, raw materials, or cash-based investments.
- Market growth. Certain funds look at fast-growing industries or developing economies.
💡 Helpful Tip: Even with many choices, you might only need one fund. Well-known investor Warren Buffett has said that most people can simply invest in a broad stock market fund to spread out their risk. But if you want to focus on certain areas, you can mix different funds to match your goals—whether that means more small business investments, more international exposure, or adding bonds to your portfolio.
3. Choose Your Funds
Now, it’s time to decide which index fund to buy. Cost is often a big factor in this choice.
One of the prominent benefits of index funds is that they don’t cost much to manage. Since they simply follow the value changes of a market group, there’s little need for active oversight.
However, not all index mutual funds are low-cost. They still have fees for management and operations, which are taken from each investor’s earnings as a percentage of their total money in the fund.
Two funds might aim to track the same market group—like the S&P 500—but their management fees can be very different. Even a tiny difference in fees can add up over time, reducing overall profits. In most cases, larger funds tend to have lower costs.
4. Choose Where to Buy and Place Your Order
You can easily purchase an index fund through a mutual fund company or a brokerage. When picking where to buy, think about the following:
- Available Funds: Do you want access to funds from different companies? Some mutual fund companies offer funds from competitors, but the selection might not be as wide as what a discount broker offers.
- Ease of Use: A mutual fund company might meet your needs if you’re mainly investing in mutual funds. But if you also want stock research tools, a discount broker that sells the index funds you want could be a better choice.
- Costs: If there are fees for buying or selling, check how much they are. Buying mutual funds can cost more than trading stocks or ETFs, with fees of around $20 or more, while stock trades often cost under $10.
- Impact Investing: Some funds focus on companies that support environmental or social causes. If that matters to you, look for funds that match your values.
- Fee-Free Options: Some brokers offer funds with no transaction fees, allowing you to save money over time.
When buying a fund, you may choose a set dollar amount to invest or decide how many shares to buy. The price per share and your budget will determine how much you can invest. For example, if you have $1,000 and the fund costs $100 per share, you could buy 10 shares.
5. Keep Track of Your Investments
Index funds are a favorite choice for many investors because they are simple to use. They also offer a mix of investments and often perform better than accounts run by professional managers. But just because they don’t need constant attention doesn’t mean you should forget about them. Here are a few things to check from time to time:
- Is the index fund working as expected? Your index fund should follow the same pattern as the market group it tracks. To see if it’s on track, check its returns on the mutual fund quote page. This will show how it has performed over different periods compared to the market group. It’s normal for returns to be slightly different because of costs and taxes. But if it’s much lower than expected, it might be worth looking into why.
- Are the fees too high? If the costs start adding up more than expected, it might be time to look for another option.
- Thinking about stocks instead? If you want to manage your investments directly, you might prefer buying individual stocks. If that interests you, learning how to do it step by step can help.
Top Index Funds with Low Costs and Small Investment Requirements
For those looking at index funds that follow the S&P 500, Nasdaq-100, and U.S. bond market, a few stand out based on fees and how much money is needed to start:
- Fidelity Zero Large Cap Index (FNILX) has the lowest costs among major S&P 500 funds we track.
- Invesco Nasdaq 100 ETF (QQQM) is the most affordable major Nasdaq-100 fund we track.
- Fidelity U.S. Bond Index Fund (FXNAX) is the lowest-cost bond index fund we track.
5 Index Funds That Follow the S&P 500
Index funds work by copying the performance of a specific market group. Before investing, it’s important to choose which one you want your money to follow.
Here are some well-known index funds that track the S&P 500 and have low fees.
| Index Fund | Minimum Investment | Expense Ratio |
|---|---|---|
| Vanguard 500 Index Fund – Admiral Shares (VFIAX) | $3,000 | 0.04% |
| Schwab S&P 500 Index Fund (SWPPX) | No minimum | 0.02% |
| Fidelity Zero Large Cap Index (FNILX) | No minimum | 0.0% |
| Fidelity 500 Index Fund (FXAIX) | No minimum | 0.015% |
| T. Rowe Price Equity Index 500 Fund (PREIX) | $2,500 | 0.18% |
Fund Details
Vanguard 500 Index Fund – Admiral Shares (VFIAX)
Often called the Vanguard S&P 500 Index Fund, this was one of the first of its kind, launched in 1976. It gives investors a way to own a piece of 500 large U.S. companies, which make up about 75% of the total stock market value.
Schwab S&P 500 Index Fund (SWPPX)
Morningstar, a research company, ranks this as one of the lowest-cost options for tracking the S&P 500. Started in 1997, this fund charges just 0.02% in fees and requires no minimum amount to get started.
Fidelity 500 Index Fund (FXAIX)
Launched in 1988, this fund used to have a minimum investment, but Fidelity removed it. Now, anyone can invest in this low-cost option, no matter how much they start with.
Fidelity Zero Large Cap Index (FNILX)
Fidelity made headlines when it introduced this fund with zero annual costs. This allows investors to keep all of their money working for them over time.
T. Rowe Price Equity Index 500 (PREIX) Fund
This fund began in 1990 and offers a cost structure that competes with others on this list. However, its $2,500 minimum might be a hurdle for those just getting started.
Top 3 Index Funds for the Nasdaq-100
Here are some index funds that track the Nasdaq-100.
| Index Fund | Minimum Investment | Expense Ratio |
|---|---|---|
| Invesco NASDAQ 100 ETF (QQQM) | No minimum | 0.15% |
| Invesco QQQ (QQQ) | No minimum | 0.20% |
| Fidelity NASDAQ Composite Index Fund (FNCMX) | No minimum | 0.29% |
Invesco NASDAQ 100 ETF (QQQM)
QQQM includes 100 of the largest non-financial companies on the Nasdaq exchange. At least 90% of its holdings match the Nasdaq-100, and it adjusts its portfolio every three months.
- Expense ratio: 0.15% ($1.50 annual fee per $1,000 invested).
Invesco QQQ (QQQ)
QQQ tracks the Nasdaq-100 and holds 101 companies. It has over $323 billion in assets under management.
- Expense ratio: 0.20% ($2 annual fee per $1,000 invested).
Fidelity NASDAQ Composite Index Fund (FNCMX)
FNCMX follows the Nasdaq Composite index and typically includes 80% of the stocks listed there. In addition to tech, consumer services, and healthcare, this fund also invests in real estate and materials.
- Expense ratio: 0.29% ($2.90 annual fee per $1,000 invested).
3 Low-Cost Bond Index Funds
Here are some of the most affordable bond index funds available. We selected these funds based on their strong Morningstar ratings (at least 4 stars) and their low expense ratios.
| Index Fund | Minimum Investment | Expense Ratio |
|---|---|---|
| FXNAX | No minimum | 0.025% |
| FIPDX | No minimum | 0.05% |
| VBTLX | $3,000 | 0.04% |
(FXNAX) Fidelity U.S. Bond Index Fund
This fund follows the Bloomberg U.S. Aggregate Bond Index, which covers a broad mix of government and corporate bonds. It has no investment minimum and carries a low expense ratio of 0.025%.
(FIPDX) Fidelity Inflation-Protected Bond Index Fund
FIPDX focuses on Treasury Inflation-Protected Securities (TIPS), a type of government bond designed to help guard against inflation. Like FXNAX, there is no minimum investment required, and the expense ratio is 0.05%.
(VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares
VBTLX also tracks a wide range of government and corporate bonds, similar to FXNAX. It has a competitive expense ratio of 0.04%, but investors need at least $3,000 to get started.
Why Choose Passively Managed Index Funds?
Many investment managers try to beat the market by picking stocks, but they rarely succeed. Even when they do, it’s uncommon for them to keep winning over the years.
In 2024, out of 3,900 actively managed U.S. stock funds and ETFs tracked by Morningstar, only 13.2% performed better than the S&P 500. While they gained an average of 13.5%, the S&P 500 itself grew by about 25%.
Since actively managed funds often don’t do as well as the market, index funds, which simply follow it, tend to give investors better results over time. They also come with lower fees, making them a cost-friendly choice.
Using Index Funds for a Balanced Investment Approach
A strong investment plan often includes a mix of stocks and bonds. Index funds help with this by holding many stocks or bonds in one place. In fact, you can build a balanced portfolio with just two index funds.
For beginners, a common split is 85% in stocks and 15% in bonds. If you’re starting with $200, you could put $170 into FNILX and $30 into FXNAX—these are low-cost options that track the S&P 500 and bond markets.
By staying invested and adding money over time, you boost your likelihood of reaching your financial goals. The stock index fund helps your money grow when the market is rising, while the bond index fund can limit losses during downturns.
Examples of Common Indexes
Here are some well-known groups used as guides for index funds:
- The S&P 500 is a simple collection of about 500 of the biggest publicly traded companies in the USA.
- Dow Jones Industrial Average (DJIA) tracks around thirty of the most established companies in the U.S.
- Nasdaq Composite follows over 3,000 stocks, mainly from the tech industry.
- The Russell 2000 Covers 2,000 smaller companies, often called “small caps,” since their market value is under $2 billion.
- Wilshire 5000 Total Market Index represents nearly 7,000 U.S. companies and is weighted by market size.
- MSCI EAFE Index Measures the performance of mid and large-sized companies in 21 developed countries outside the U.S. and Canada, including those in Europe, Australasia, and the Far East.
Costs to Consider for Index Funds
Index funds often cost less than other types of funds, but there are still some fees to be aware of:
- The investment minimum is the lowest amount needed to start investing in a mutual fund. Some funds let you begin with nothing, while others require a few thousand dollars. After this first step, most funds let you add smaller amounts over time.
- The account minimum is separate from the investment minimum. Some brokerage accounts, such as those for retirement plans like a Roth IRA, allow you to open an account with no money. However, that doesn’t remove the starting amount required for a specific index fund.
- The expense ratio is one of the main costs of an index fund. It’s a small fee taken from your investment, affecting your returns. You can find this percentage in the fund’s details on financial websites or official documents.
- A tax-cost ratio means holding an index fund outside of tax-friendly accounts, like a 401(k) or IRA, which may result in capital gains taxes. These taxes, like other fees, reduce overall returns.
Final Thoughts
Index funds offer a simple and cost-friendly way to invest in the stock market. Following well-known market groups provides broad exposure to different companies and industries. Since they don’t require active management, they often come with lower fees and can perform well over time.
Index funds can be a strong option for those looking to grow their money steadily. Whether focused on stocks, bonds, or a mix of both, choosing the right funds based on your goals and monitoring costs can help you build a solid investment plan.