Once you manage to spend less money than you enter , you save. And if you prolong the savings over time, you can invest with guarantees . Investment is one of the easiest ways to make your money work for you by generating a month-to-month income. There are many investment products in the market (including index funds) that, in general, can be classified as active management and passive management products .
We speak of active management when a manager or adviser draws up an investment portfolio based on a series of criteria, such as the risk that the investor wants to assume or the time frame of the investment. The result of the fund will depend on the skill of the professional who has made it and we expect that the return obtained by your fund is higher than the market average, in our case the IBEX35 .
Meanwhile, with the passive management funds there is no human intervention when it comes to making it, but rather they replicate to their reference index, for example, to the IBEX35. Managers only have to adjust the fund according to the companies that enter and leave the IBEX and the weight of each in the index.
What are index funds?
Indexed funds are one of the star products of passive management and, according to Warren Buffet – the third richest person in the world and, for many, the best investor of the century – the safest and most profitable option to invest in the stock market .
Like any passive management product, the main characteristic of an indexed fund is that it replicates the evolution of a stock index , so it obtains the same performance as its reference index. There are many studies that suggest that this type of investment offers greater long-term profitability than active management funds.
Advantages of index funds
Indexed funds have some advantages over active management funds that make them very attractive to investors. These are the main ones :
- They have lower costs , so it is cheaper to invest in them
- They get better results . Due to the lower costs since there is no direct human management behind them, the performance of these funds is higher.
- They allow you to diversify your investment portfolio without too many complications, since they replicate stock indices that are already diversified.
- They have tax advantages when making transfers, although in this they do not differ much with respect to the funds of active management.
- You can use roboadvisors to manage them if you do not have investment knowledge.
In spite of all these advantages, it must be clear that as an investment fund, it has specific associated risks that you should know about . The main one is that the market experiences phases of ups and downs, so it is impossible to know for sure what will happen, although this should not worry too much if your investment is long term. However, it is almost impossible for an indexed fund in the long term to be unprofitable, since the logical tendency of any stock index is to grow in value as the years pass.