Index funds are a risky investment, just like any other. The general risks that apply to the securities in the index that an index fund tracks will also apply to the index fund. The fund could also be exposed to other dangers like:
a lack of adaptability A non-index fund may be more able to respond to price drops in the index securities than an index fund.
Error in tracking. An index fund might not replicate its index exactly. For instance, if a fund only invests in a portion of the securities included in the market index, its performance might not be as likely to track that of the index.
Underperformance. Due to trading costs, tracking mistakes, and fees and expenditures, an index fund may perform worse than its benchmark.
Prior to Investing
You should thoroughly study all of the fund’s accessible information before investing in any fund. These comprise the prospectus for the fund and the most current shareholder report. Funds also declare their quarterly portfolio holdings to shareholders and in Form N-Q. Typically, the fund’s website, your financial advisor, and EDGAR are where you can find this information.
The following inquiries could be helpful:
- What costs and fees can I anticipate incurring while purchasing, holding, and selling this fund?
- What particular dangers are connected to this fund?
- How is the index for the fund’s composition chosen?
- How well do my investment goals align with the fund’s investment strategy?