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Investors in South Africa’s stock market often follow the Financial Times Stock Exchange (FTSE) and Johannesburg Stock Exchange (JSE) FTSE/JSE All Share index. It is the largest index in terms of both size and value, and it is made up of companies that collectively represent roughly the largest 99% of JSE main board companies by market capitalisation.
For a long time now, investing in index funds has been considered among the best financial decisions one can make. This is because index funds have the advantages of being low-cost, allowing for diversification, and typically producing high returns over time.
Over time, index funds have beaten out other types of funds that are actively managed by major financial institutions.
The low expenses, high returns, and high diversity offered by index funds make them a popular investment option. Take a look at these major advantages below:
Investing in the JSE all share index allows you to diversify your portfolio quickly and easily, reducing the risk of losing all of your money.
Investing in a fund that contains a wide variety of stocks will provide your portfolio the same return as the index, despite the fact that the performance of each individual stock will vary over time.
By spreading your investment dollars across many different companies through a single index fund, you can reduce your portfolio’s reliance on the performance of any one company in the index.
Index funds like the JSE all share index offer many of the same benefits as other investment funds, but with the added bonus of potentially cheaper costs, such as taxes and management fees.
First, there is the annual management fee charged by each fund manager. The expense ratio of the fund will influence how much money you’ll have to pay for various investments.
There is typically a one to two percent charge ratio for actively managed mutual funds. The vast majority of the cost is allocated to the portfolio manager’s efforts to outperform the market through strategic buying and selling.
Conversely, index funds are not actively managed. Since index funds merely purchase and hold all of the stocks comprising an index, their holdings are essentially static. Because the manager of an index fund doesn’t have to do much effort, the management fee is relatively modest.
Expense rates for index funds are normally between 0.05% and 0.07%, with certain funds offering even lower expense ratios of 0%.
A fund’s turnover ratio indicates the rate at which its holdings are being replaced. If a fund buys 100 equities but sells 10 of them this year, the turnover ratio is 10%.
Index funds, being less actively managed, inevitably have a lower turnover ratio. In comparison to the 20% or more seen in certain actively managed mutual funds, the annual turnover ratio for index funds is typically between 1% and 2%.
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Index funds are easily accessible through any brokerage or mutual fund business. While some companies may outperform the market while others may underperform, the stock market as a whole tends to gain in value over time. Therefore, index funds are a great deal for any investor because of the large returns they provide for so little outlay.
When you think about investing, consider index funds.
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