Index funds and compound interest
An index fund is a cheap and easy way to invest in hundreds or thousands of companies at once. When you save regularly and keep costs low, your returns start generating returns of their own. This guide covers choosing a fund, costs, taxation and risks.
You will need
- Online banking credentials
- A fund account or a book-entry account
- A calculator or a compound interest calculator
- A savings goal and time horizon
Steps
Define your time horizon
Only put money into an equity index fund that you won't need for at least 5–10 years. Short-term savings belong in a bank account or a fixed-income fund. The longer the time, the better the price swings even out.
Understand what an index fund is
Compare costs
Choose broad diversification
Start a monthly savings plan
Choose growth or income units
Calculate compound interest
Stick to the plan in a downturn
Take care of the taxes
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