What Is an Index Fund?

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An index fund is a collection of stocks in a particular sector of the market that tracks an index instead of being managed by a person. Keep investment costs down by choosing an index fund with help from a financial planner in this free video on investments.

Part of the Video Series: Investment Facts
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Video Transcript

Hi, there. I'm Cathy Pareto, the founder of Cathy Pareto and Associates, certified financial planner, here in Miami, Florida. In this clip, we're going to be talking about what is an index fund? Now, I, particularly, love the use of index funds. I use them in my client portfolios and personally. And all it is is this: You have traditional mutual funds, which are...can be called for a lack of a better term, actively managed by a portfolio manager, and these typically have higher expenses than an index fund, which I'll explain to you in a second. An index fund is merely a collection of stocks -- a collection or a basket of different securities -- inside a particular sector or category of the market. There is no portfolio manager, per se, that's making decisions based on whether they like this company versus that one or they want more cash versus, you know, more stocks. An index fund merely tracks an index. You hear about indices...indexes all the time on the news, whether it's the Dow Jones or the S&P 500. All it is is a basket of stocks -- that's it. And that's what you're owning in an index fund. You can buy index funds in different categories of the market. You can buy them domestically or abroad. And an index fund is a great way to keep your investment costs down to a minimum, and they're very tax efficient and I really believe in the use of them. And so that's a little bit about index funds, and this has been Cathy Pareto in Miami, Florida.

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