Mutual funds come in a number of different categories, which all vary according to the rates of return, risk factor involved as well as the period of time they take to mature. An index mutual fund is a category of investment that seeks to ensure stability of a specific financial market, regardless of the prevailing market condition, be they good or bad. They do so by tracking the performance of the securities in a particular investment.
To ease the tracking movement, there is a software that one can make use of. The software requires little human input and hence, there is minimal interference with the records. This means that index mutual funds therefore require no form of active management and can do well in passive management. This directly translates to lower management fees and lower taxes as well.
Index investments can be bought from many investment managers, some of which include Dow Jones Industrial Average, the Wishire 5000 and the FTSE 100. Other indexes have been personalized by some individual companies in order to be able to develop investment pricing systems. The indexes, whether personalized or captured in a software, should be guided by research which touches on dividends, earnings, book value and sales as well.
There are many methods of creating indexes and one should be aware of the different methods, in case they would want to understand the differences in the methods. One of them is the traditional indexing which is the practice of owning a collection of securities in the same ratios as the target index. The synthetic indexing is the use of a combination of equity and low risk bonds. The combination is meant to replicate the performance of a similar investment.