What Is An Index Fund?
An index fund is an investment fund that holds a small percentage of a large number of companies.
This "large number of companies" is referred to in investment jargon as an "index".
For example, the S&P 500 index comprises the 500 largest companies in America.
When you invest $1,000 in an S&P 500 index fund, you are actually investing a few dollars into 500 different companies.
As an example, your $1,000 investment might look something like this:
- $90 Apple
- $88 Microsoft
- $75 Google
- $60 Tesla
- $56 Visa
- $50 Johnson & Johnson
- $45 Exxon Mobil
- $40 Walmart
- and so on and so on....
Investing in index funds are generally considered safer investments because instead of putting all your money into one company, your bets are hedged over hundreds of companies.
If a company in the index goes bankrupt, you will only lose 1% of your investment, rather than 100%.
It also means you will not need to worry about underperforming the market.
When you invest in an index fund, you're invested in the entire market, which means your returns will equal the market average every year. If the market returns 10% on average each year, your return will be 10%.
Finding A Sharebroker
To buy an index fund, you will need a broker.
For buying index funds, you have many options in New Zealand.
If you're in New Zealand, you can also invest directly with Smartshares, which is something I personally do.
There's another brokerage I think is great for beginners, which is InvestNow.
For this particular example, I will be using Sharesies, as it's the only one that allows you to invest $100 (the others have higher minimum orders).
Through Sharesies you can invest in all the major indexes, such as the S&P 500, Dow Jones, ASX 200, NZX 50 and more.
To open an Sharesies account, you can sign up at their website. You will get $5 free if you use this link!
How To Buy Your First $100 In Index Funds
Once your account is set up and you've deposited funds, investing in an index fund is as simple as two or three swipes.
In this example, I'm going to buy $100 of shares in the Smartshares NZX 50 fund.
In your Sharesies account, go to the "Explore" tab.
We're going to search for Smartshares NZX 50 fund.
It should come up like so:
What is this fund?
It invests in the 50 largest companies in New Zealand.
That's things like Auckland Airport, Meridian Energy, The Warehouse, Spark and Air NZ.
Clicking into the fund will bring you to the information page, where you can see things like the management fee, dividend yield and so on.
Simply click on the Buy button and you'll be taken to the order screen:
We're going to select Market Buy.
This means you are going to invest in the fund at the current market price, rather than setting a specific price to target in the future.
I'm going to place an order to buy $100 worth of shares:
Finally, you need to review your order.
As you can see, we're buying $100 of the NZG Smartshares fund at the market price:
Click Buy and your order will go through to the market and execute.
You've just bought your first $100 in index funds!
What Do I Do Next?
Once you've started investing in index funds the best thing you can do is ... don't stop!
The share market has historically grown at about 10% per year over the long term, so as long as you keep investing, your wealth is likely to keep growing.
Using our compound interest calculator, we can see that even investing just $500 a month in an index fund over your working career (40 years) will leave you with over $2.6 million:
Which Index Fund Should I Buy?
If you're based in New Zealand, an NZX 50 fund is a good place to start.
It's familiar, and you should recognise the companies that you're investing in.
However the beauty of investing is you don't just need to stick to one fund!
You can (and should) branch out once your investing experience grows.
An S&P 500 fund is a logical next step, as it gives you ownership in the world's biggest economy (USA).
From there, you can start to research other funds, like emerging markets, Japan, Europe, Asian tech, green energy and so on.
This guide is everything you need to get started and start building a stock portfolio.
However, if you'd like to learn more, such as picking individual stocks, analysing companies, and expanding into more unique index funds, my course Simple Stocks is for you! Click here to learn more.