Problems With Index Funds
| As with any investment, there are pros and cons with index funds too. Although many experts believe that the simplicity of investing in index funds and the cost savings that one can derive should make index funds the first choice for investment, there are others who think otherwise. There are problems with index funds and it is in your own interest to learn about them. |
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Problems with Index Funds:
- Index funds may work in up markets but perform very badly in down markets.
- It is impossible for fund managers to beat the index on an annual basis. In fact, beating the index should not be used as a criterion for judging fund managers’ performance.
- Fund managers have to create portfolios for clients that help them make money rather than concentrating on indexing theory.
- To prevent catastrophic losses, the index fund should have mixed assets.
- Index funds are not always cheap, tax efficient or offer decent investment choice.
- Funds based on pseudo indexes should not be part of your portfolio. A good example is green energy stocks.
- Narrow index mutual funds often have high expense ratios and high turnover, thereby doing away with the two biggest advantages of index fund investing.
- People who already have well-structured investment portfolios should avoid dismantling them to invest in index funds. If they do this, they will have to incur high taxes, commissions and other transaction costs. In addition, timing errors could easily wipe out any hopes of cost savings that are usually associated with investing in index funds. That is the reason why it is said that one size does not fit all.
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