23 Jul 3 Issues about Index Funds that Are Untrue

Investing has associated risks. Stock market investing attracts risks such as market volatility that reduce the value of investments. Investors hope that they will get good financial returns in the long-term. The stock index fund is not capable of offering sufficient protection during stock market volatility. Many investors believe that index funds have less risk if compared to the active funds. Active funds attempt to exceed the benchmark. The article explains three myths about the index funds.

1. Index funds protects the investor from market volatility

The majority of financial investors believe that index funds increase portfolio stability. This assumption is not correct because index funds and active stock funds experience market risks. The investment returns are influenced by market conditions and hence rise or fall depending on the economic situation. Major changes have been illustrated by the average S&P 500 fund over one year. Averages indicate limits; however, large market volatility presents risks to both active and index funds.

2. Index funds offer more safeguards than active funds from market volatility

Index funds experience the same level of risks as the active funds. Investing strategies require the minimization of losses of active stock funds in the long-term. This is because the active stocks outperform the market in the long-term. A suitable active fund can outperform within the full market cycle, despite being slow in some cases in the bull markets.

3. Selling funds in volatile period minimizes losses

Most mutual fund investors believe that it is better to remain invested during the period of market volatility. However, some mutual fund investors react immediately when the market has several highs and lows. They prefer to sell the funds during a volatile period, so as to minimize or prevent short-term losses. Investing strategies show that selling active and passive funds in market downturn results in under-performance. Exchange-Traded Funds also under-perform when sold dung market volatility.

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