What Is the Definition of Equity Index Funds?

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There are a variety of investment vehicles that can be used to make your money work for you. They include stocks, bonds, equity funds, index funds or an equity index fund. An equity index fund is the combination of an equity fund and an index fund.

Equity Fund

  • An equity fund is a type of mutual fund that invests primarily in stocks. Equity funds are either actively managed (the fund manager makes specific investments with the goal of outperforming an index), or passively managed (the fund manager makes as few transactions as possible in order to minimize transaction costs).

Index Fund

  • An index fund is a type of mutual fund that seeks to achieve the same rate of return as a particular market index, like the Standard & Poor's 500 index or Dow Jones Industrial Average. An index fund is passively managed; the fund manager makes as few transactions as possible, and in some funds, the investment holdings are automatically selected.

Investment Goal

  • The goal of an equity index fund, like a traditional index fund, is to achieve the same rate of return as a particular market index. What separates an equity index fund from a traditional index fund is that it is primarily made up of stocks.

Strategy

  • The investment strategy of an equity index fund is to either hold all of the stocks in the index fund it hopes to replicate the returns on, in the exact same proportions as that index fund, or to invest in stocks that are representative of that index fund.

Benefits

  • Because equity index funds are partly index funds, they have fewer transaction costs and are less expensive to manage than tradition mutual funds.

References

  • Photo Credit Image by Flickr.com, courtesy of Alan Cleaver
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