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Index-tracking funds
 Simple products are usually the best
Does the thought of investing in the stock market scare you? It doesn't have to, even in these uncertain financial times. Investing in individual companies (like Vodafone, BT, Shell, GlaxoSmithklein for example) can certainly seem scary if you don't know much about investing. Actually, even if you're a professional investor, it can still be worrying! But, one way to reduce the risk but still make some good money over the years is to invest in a lot of companies - a whole lot, all at the same time. That's essentially what Index-tracking Funds (Tracker Funds) do. The other really handy aspect of Tracker Funds is that they're also really cheap to invest in - and they're easy. Read on to see how to do it. Tracker funds 'track' a particular stock market index by investing some of your money in every single company in that index. So, according to a clever computer calculation, it puts a small amount of your investment into every company in the index. This means that as the index goes up or down (depending on how all the companies in the index do each day) your investment goes up and down with it. There are various 'indices' in Britain and around the world that you could invest in. For example, the 'FTSE 100' (the index that we keep hearing about in the news) is made up of the 100 biggest companies in the country - the top 100 companies in the British stock market. They are 'listed' in the London Stock Exchange. Another index is the FTSE All-share which is all the big companies that are listed on the London Stock Exchange (well over 700 of them). There are many other indices around the world as well like the Dow Jones or the Nasdaq in America, the Nikkei in Japan, the Hang Seng in Hong Kong and the DAX in Germany. That is not guaranteed. If you invest in a FTSE 100 index-tracking fund, your money will be spread over all one hundred companies in this index. This means that you will be investing in at least 100 companies all in one go, though you will have a different amount in each one. In Britain there are funds that track the FTSE All-share, the FTSE 100, the FTSE 250 and the FTSE Tech Mark among others. If you put your money into one of these funds your investment will go up and down pretty much in the same way that the index goes up and down. Over time though, the net effect has been that these funds have gone up. Historically the stock market has always gone upwards, though in a very bumpy way. Sometimes it will go down for a few years but then it will go up again for a few more years. So if you leave your money in one of these funds for long enough (at least five years) you can be pretty confident that it will generally go up. After all, that is what it has done for the last hundred years. Index-tracking funds or 'tracker funds', are a simple and cheap way of investing in the stock market. They're cheaper than managed funds (funds that are put together by real live fund-managers in the City) and tend to perform much better, partly because they're cheaper - they take less of your money in fees before they invest it. They charge less than the managed funds because they’re run by computers which, unlike your average City fund manager, don’t expect a new Porsche Boxter and a holiday in the Bahamas every year. In fact, you shouldn’t pay more than 1% a year in management fees for your index-tracker, and some charge less than 0.5%. Index-tracking funds are relatively easy to invest in. The only hard part is choosing which one. How do I invest in an index-tracking fund? It's very simple to invest in an index-tracking fund. For example, if you invest in a Legal & General index-tracker you should click on the 'investments' button at the top of the homepage, then under 'Apply online' click 'Unit Trusts'. Click on 'Apply now' and you can fill in the online form with your name, address and so on. You will then have a list of possible tracker funds to invest in including global, European, Japanese, US and UK funds. It's entirely up to you which you invest in and how much you put in them. We suggest that you put money in different funds and different countries over the years, but if you have never invested in a stock market before then you might prefer to invest in the UK one to start off with. There's not a lot of difference between the performance of the two main indices - the 100 and the All-share. Some years the FTSE 100 will do well, others the FTSE All-share will do very well and so on. It's probably a good idea to invest in one the first year and then another the next year. You could also invest in the 250, the Tech Mark or foreign indices such as the Dow Jones. Isa allowance Then you get an option to have some or all of your investment wrapped in a tax-saving Isa. This is a good thing to do if you haven't already used up your Isa allowance (£7,200 per tax year). If you don't want to put all your money into a stocks and shares-based Isa you can just put some in a mini shares Isa and the rest in a mini cash Isa (remember you cannot put more than £3,600 in a cash Isa). You will also be asked if you would like to put in just a lump sum or make regular monthly investments. It depends on your circumstances what you do here. If you have a lump of money to invest now then go ahead and put it in. But if you don't, and you think you can afford a certain amount each month, then set that up as a direct debit from your bank account. Sitting on your investment Once you finish the application you will be sent paper forms to fill in and you will probably need to show that you are who you say you are (annoying anti-money-laundering legislation insists on that). That will mean sending some household bills or similar, which they will send back. Once you have invested your money in a tracker fund you can pretty much forget about it apart from when you get a report on your investment from the company - usually twice a year. Some years your money will have increased, other years it will go have gone down, depending on how the index itself did that year. Remember, you need to have your money in that investment for at least five years to get any real benefit from it. Over the long-term these funds have historically gone up, even though at times it looked shaky! See below for a list of some of the companies that offer index-tracking funds. They're all easy to invest with and all are good names. When it comes to choosing which company to go with there's not a lot to choose between them really. The annual charges are the main thing to consider; just go for the cheapest on the whole. Also, it's a good idea to mix and match as the years go on. Put some money in one of them one year, then try another one the next year and so on. After a while you could also be adventurous and try funds that track foreign indices. There - you're investing in the stock market. That wasn't hard was it?! Useful links |
Jasmine and the Moneymagpie team
Moneymagpie Moneypedia
23.06.2008
