How To Invest In Index Funds In NZ

Date Nov 30, 2021
Blog category Kiwisaver
By Staff writer
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How do you know what type of investment in NZ is best for you? 

Several options are available to different types of investors like bonds, shares, term deposits, properties, and business. But if you're just starting to look for ways to increase your income, you might want to consider getting into index funds, as highly recommended by Warren Buffet and one of the easiest ways to be financially independent and retire as soon as you can. 

It can be difficult to understand at first, but as with other investment options, it takes time to fully understand the concept and start earning money later on. 

What are index funds?

A managed investment fund is a portfolio of stocks and other assets. Rather than purchasing shares in a single company, you can invest in a portfolio of them. Fund managers buy and sell assets within the fund to generate profits for their clients by attempting to predict market moves. This is what they call "active" management.

A different approach is taken when dealing with an index fund. Consider two well-known indexes: the S&P 500 index and the Nasdaq composite index. It's essentially a collection of corporate stocks that resembles a financial index, with slight intervention from fund managers.

It's a great strategy to get started with your initial set of investments as it does not need much thought on the part of the new investor.

By investing in the S&P 500 index fund, for example, you are already invested in the 500 largest companies in the US, or in the NZ 20 Fund, you begin to invest in the 20 largest companies in New Zealand.

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Pros and Cons of Index Funds for beginners 

Why invest in Index Funds 

  1. Diversifies your portfolio, reducing the possibility of losing your money.
  2. Taxes and management fees are cheaper than in other forms of investment funds, which is between 1% to 2% that are paid to portfolio managers. 
  3. Generates less taxable income, which must be distributed to shareholders.
  4. Yield substantial profits at a low cost over the long term. 

Some disadvantages

  1. Your portfolio drops as the indexes fall. 
  2. No control over the companies you invest in, even with a fund manager.
  3. Incurs fund expenses, cash balance and portfolio balance due to tracking errors. 

How to invest in index funds

With the different options currently offered, it might be difficult to determine the right one for you. 

Know your goals 

Start by knowing your goals and aligning them with your age, risk tolerance, and present financial situation. 

For those of you who want to leave your investment untouched for 5 years, it’s advisable to go with an index fund that invests in shares. However, if you need the money right away, you might want to invest in bonds as well. 

Select an index 

Like any other investments, it takes time and extensive research to learn about index funds. However, once you've understood the nuances of this type of investment, you can already start investing. 

The first step is to select an index or indexes. Some major indexes in NZ include Dow Jones Industrial Average, S&P/NZX 50 Index and S&P/ASX 200. The figures would indicate the total number of companies you may invest in once you begin with index funds. 

Decide which index fund to invest in 

Before you do anything else, you should understand the different charges, such as opening account minimums, management and membership fees, and tax benefits, and portfolio construction of index funds, as well as the background of the managers of the specific fund you want to invest in.

What are the differences between ETFs and Index funds?

  • Exchange traded funds (ETFs) are listed on the stock exchange like shares, whereas index funds are unlisted managed funds.
  • The price you pay for an ETF is its market value relying on its market performance. The price of an index fund is the net asset value of its underlying securities.
  • ETFs can be purchased and sold at any time, whereas managed funds are priced only at the end of the day.
  • ETFs have a lower initial investment, which can be as little as $100, whereas index funds normally require a larger minimum investment of more than $5,000.
  • ETFs charge a brokerage fee when purchasing and selling, whereas index funds do not, making the latter a suitable alternative for those who want to add small sums to their fund over time.
  • ETFs often have lower tax and management costs than index funds.

Is investing in Index Funds right for me?

Beginning with index funds can provide rookie investors with the promise of ownership in a diverse range of equities, more diversification, and lower risk. As a result, index funds have been seen as a better option than individual stocks.

How much do I need to invest in index funds in NZ? 

You typically need between $5,000 and $10,000 to begin investing in index funds as you also need to cover for costs like fund maintenance and annual charges including membership fees. But you can always check which index funds are compatible with your finances through Sharesies, Hatch, and other NZ issuers.

Looking to save up for the long-term?

Index fund is just one of the common examples of a type of managed fund. Kiwis can also consider other investments such as applying for a KiwiSaver account.

Start saving today by comparing the best KiwiSaver fund using our FREE comparison tool!

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