Trackers 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 a tracker fund?

It’s very simple to invest in an index-tracking fund. The one we like best (and Jasmine has invested in it a few times) is the Legal & General tracker fund. They are one of the biggest providers of index-tracking investments in the UK, managing £180 billion as at 30 June 2009. They’re responsible for investing £287 billion worldwide (as at 30 June 2009) on behalf of investors, policyholders and shareholders. Also, they’re one of the very few financial companies actively to promote tracker funds and they offer their funds pre-wrapped in an ISA so it makes ISA-investing nice and easy too.

It’s easy to apply. Go on their tracker fund site and pick one you like (perhaps a UK 100 Index or a Pacific Index – be adventurous!) and then start the application process. You will need your National Insurance number and your bank details but otherwise it’s pretty straightforward.

National Friendly’s ISA application process is nice and straightforward as well. Simply click on the ‘Apply Now’ button, fill in your personal details and select which ISA you want. That’s pretty much it!

It’s important to remember that whichever fund you invest in, it’s a gamble as to whether you will make a good return or not. However as we said, as long as you are in it for the long run you should make some money on your investment.

ISA allowance

You also 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 stocks and shares ISA allowance (£10,200 per tax year). Many companies that provide tracker funds also offer them pre-wrapped in an ISA which makes it easier. Legal & General, for example, offer their impressive fund already wrapped in an ISA.

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 £5,100 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.

You could also set up an ISA wrapper of your own into which you put a tracker fund and some other investments, depending on what interests you. You can do this through Hargreaves Lansdown who provide an ISA wrapper into which you can put a tracker, individual shares or other funds.

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, ideally ten, 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?!

Download this free guide to investing in times of reducing interest rates. 

Useful links

• Legal and General
• Hargreaves Lansdown
• National Friendly
  
• M & G
• Scottish Widows
• Virgin
• Gartmore

10 Responses to “Index-tracking funds: the easy way to invest in the stock market”

1. Linda says:

   April 9, 2012 at 3:14 pm

   Most of the links on this page go nowhere so it was not much use to me.

   Reply
2. Radostina Dencheva says:

   March 5, 2012 at 4:01 pm

   “There’s also nothing to stop you investing in a fund that tracks one of the many other indices, such as AIM”

   Could you please name one? Thank you!

   Reply
   • Jasmine Birtles says:

     March 5, 2012 at 10:15 pm

     Sure, Legal & General, for example, has index trackers that track the US index, a European index and a Global index. there’s also HSBC Pacific – those are just as examples.

     Reply
3. Samina says:

   July 19, 2010 at 1:02 pm

   Hi,

   I wish to choose which company stocks i want to invest in. Can this be done in any way? As an example say if I wanted to invest in Next, can I go to the bank where I hold my tracker fund and tell them that I want to specifically buy some Next shares?

   Reply
   • Jasmine Birtles says:

     July 20, 2010 at 12:01 am

     Well if you want to buy shares in Next you would need to do this through a stockbroker. You can do it through an online stockbroker (which is the cheapest and easiest option) like TD Waterhouse. You could also do it through your bank if they have a share-dealing service although that will probably be more expensive. If you have a tracker fund then that will ‘track’ a whole range of companies, not just one, so you can’t mix the two types of investing. I’ll do a step-by-step article on how to buy shares in individual companies like Next so that you know.

     Reply
     • Samina says:

       July 20, 2010 at 11:21 am

       That would be really helpful. When is the article likely to be done by so that I can keep an eye out for it? Thanks

       Reply
4. Ciaran says:

   May 23, 2010 at 1:13 pm

   Hi
   I heard a lady on the radio yesterday who spoke of this site, and I find this is all really interesting, but how easy is it to close or withdraw from these schemes and would you loose money etc.
   thanks

   Reply
   • Jasmine Birtles says:

     June 3, 2010 at 5:10 pm

     Hi Ciaran, It’s pretty easy to open and close these. You can withdraw your money just by contacting the tracker fund company (either by email or by phone) and asking them to transfer the money into your bank account. Yes you certainly could lose money but you’re less likely to if you leave it in there for several years (ideally 10 or more I think). These are long-term investments and they only really work if you keep them for many years.

     Reply
     • Ciaran says:

       June 8, 2010 at 10:30 pm

       thanks, best wishes.

       Ciaran

       Reply
5. Penny Salma says:

   April 20, 2010 at 12:15 am

   Thanks for sharing, I just wanted to let you know that your blog doesnt show up perfectly on the blackberry browser but I am probably still in a minority of users.

   Reply