Index Funds and other Residual Income Investment Ideas
Ever wondered how you can make your money work for you by doing nothing? Then take a step into the world of Index Funds. You would need to first understand what a stock market index is. The two most common stock market indexes are Dow Jones and (Standard & Poor’s 500 index) S&P500 while others like the Russell 2000, MSCI EAFE and DJ Wilshire 5000 are less commonly invested in by retail investors (like you and me).
An index fund manager mimics the investments that make up an index like the S&P 500 in a managed portfolio. When you invest in a index fund, you are effectively investing in all the companies that make up that index, giving you an extremely diversified portfolio.
Index funds help you keep a diversified portfolio while reducing the common high risks that are prevalent in a turbulent market for one particular stock. For instance, if one stock in the group of stocks performs poorly, the remaining stocks will buffer you against the losses you stand to incur from the poorly performing stock.
Can Index Funds Be a Passive Income Investment
Passive income is defined as money earned by investing in ventures that require minimal input and effort on a daily basis. These activities include renting a house, or interest earned from an asset. While an active income like a monthly salary requires your time and energy, passive income is generally a hands-free form of investment where little daily or no input is required.
As an investor, all that is needed is identifying a good stock index, rounding up your money, buying in and watching your dividends come in. When you buy an index fund, you are essentially buying portions of the companies within the fund thereby becoming a part owner of the said companies. Your duties in these companies are to sit back and enjoy the fruits of your investment. Essentially, an index fund is a long term passive income investment.
Managed Funds Versus an Index Fund
A managed fund is an investment fund that is run by an agent on your behalf. Typically the agent buys and sells shares and other assets on your behalf and you receive an income from the sales or distributions on a periodic basis. An agent spends every day attempting to beat the market by trading your holdings in the different stocks at the best possible price. For Index Funds, the main goal is not to beat the market but instead follow the market and generate a steady income through dividends and a rise in the index value which will enable you to sell parts (or all) of your portfolio in the future for a profit.
Additionally, the cost of owning a managed fund is relatively high when compared to owning an index fund mainly because of the management fees which are generally rated at 2-25% of the investment. Since index funds do not require a significant amount of management fees are generally less than 1% of your investment. Additional costs that plague the managed funds are high trading costs and fractional costs which come as a result of the strict management systems employed by the agent.
A striking difference in the two is that for an actively managed fund to succeed, a great reliance on stock market research, market forecasting and the fund manager’s experience and expertise will be required to make the right investment work for you.
Passive Income from Index Funds
Index funds annual return on investment varies based on the year and index fund. As a general guide, commonly traded index funds have returned between 5 and 15% return each year. Not bad for simply following the market.
If you would like to learn more about investing in index funds in Australia have a look at Vanguard Investments as they are the sole index retail manager for Australians.
Other Residual Income Investment Ideas
There are a number of residual income investment ideas that you can employ to generate a passive residual income. For more ideas on passive residual income sources have a look at this site http://passiveresidualincomefreedom.com
