Who: This post is for people who want to know why many people advocate index funds as an investment choice. If you’re familiar with index funds already, this post probably won’t tell you much more than you already know, but it is a good segue into the 2nd part of this series.
What: This is the first in a set of 2 posts about index funds. This first post will highlight the good and the 2nd post will talk about the caveats and some drawbacks to index funds.



Index Funds are Cheap. A mistake that many intermediate investors make is to use their newfound investing knowledge too much. Some investors trade very frequently, acting on all of their hunches and ideas, buying and selling at the drop of a hat and piling up commissions and fee-loaded funds. Commissions and fees erode returns and most index funds have very low fees. Naturally, this makes them a solid pick.

Index Funds are tax efficient. Without going into details about income taxes, I will describe what this means. When funds buy and sell securities, the profit that they make is required by law to be passed onto its customers in the form of a distribution. This distribution is commonly referred to as a capital gains distribution. When distributions are received, they are taxed at your income bracket (if they are short term capital gains). Funds with higher turnover (more buying and selling) will have higher taxable distributions and funds with lower turnover will have lower distributions, which means you pay less taxes.

Index Funds Give Instant Diversification. Hopefully, this one does need much explanation. When you purchase an index fund, you are purchasing a basket of securities which diversifies you. Diversification is one of the best deals on this planet.

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