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Mutual Funds

Index Funds

What are some reasons not to invest in an index fund?

While there are certainly many advantages to investing in an index fund, with its low (or no) fees, broad market coverages, and good returns, some experts believe there are some distinct disadvantages to investing in index funds. As the market that your index fund tracks increases, so do your holdings. But the opposite is also true. As the market for your index or index fund declines in value, so will your holdings. Many individual stock investors believe in culling out the poorly performing available stocks in which to invest in favor of a refined selection of the top performers. This strategy is asserted by many who try to outperform a benchmark index through proper selection. Index funds do not remove poorly performing stocks, nor do they actively trade a selection of stocks. One expert argues that although many index funds may represent some perceived modicum of diversification to investors, usually as the general market declines in value, so do both index funds and actively managed diversified portfolios or sectors of mutual funds. This expert also argues that index funds provide some investors with a perceived false sense of security. Just because you are invested in an index that seems always to be increasing does not necessarily mean it will continue to do so.



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