How to invest in index funds

An index fund is a type of passively managed investment fund (often a mutual fund or exchange-traded fund (ETF)) that aims to match the performance of a specific market index (e.g., the S&P 500) rather than trying to beat it through active stock picking.

Index funds work by holding a diversified portfolio of stocks, bonds, or other assets that mimic the performance of a certain index. Instead of hiring a fund manager to pick individual stocks, the fund automatically tracks a chosen index (like the S&P 500, Nasdaq, or a bond index). Generally, when an index changes (e.g., if companies are added or removed), the fund adjusts its holdings to mirror those changes.

The goal of index funds is to replicate the index’s returns, rather than outperform it. Index funds can help to diversify a portfolio and spread risk across many companies and sectors, and also offer a more simplified way to invest since they don’t require selecting individual stocks. Index funds have also shown historically strong performances, with the S&P 500 averaging at about 10% (before inflation) since 1957.¹ However, it is also important to note that past performance does not guarantee future returns.

Index funds are also known for their low expense ratio compared to other investment products, however, not all of them are low-cost. Low-cost index funds matter because even small differences in fees can largely impact your long-term investment returns.

Investment funds typically charge an expense ratio, which is an annual fee (as a percentage of your investment) that goes towards managing the fund. Low-cost index funds generally have a lower expense ratio than actively managed funds. For instance, as of 2025, average expense ratios for passive U.S. equity funds are 0.05 % compared with 0.66 % for active funds, but rates may vary. While this may appear like a minor difference, it can potentially amount to tens or hundreds of thousands of dollars lost in growth over decades of compounding.

Low-cost index funds can be more accessible to investors due to lower fees, and they also let you keep more of your returns compared to actively managed funds. Furthermore, they may often outperform higher cost alternatives and can help your investments grow over the long run.

Before learning how to invest in index funds, it is also important to understand potential risks and other considerations to keep in mind. While index funds are popular for their low costs and simplicity, they’re not risk-free. Here are some things to look out for.

• Market risk

Index funds aim to track the market, not beat it, meaning if the market goes down, so will your index fund. You might want to ensure your investment horizon and risk tolerance can handle short-term volatility.

• Long-term commitment

Index funds are generally used as long-term investments, to hold your money over years or decades. You might want to ensure this aligns with your investment goals before getting started.

• Concentration risk in some indexes

Not all indexes are evenly weighted. For example, the S&P 500 is market-cap weighted, so a few mega-cap companies (e.g., Apple, Microsoft, Amazon) make up a large portion. If those companies perform poorly, the whole index fund can be heavily affected. You might want to fully understand how your chosen index is constructed and whether it’s well diversified across sectors or overly concentrated.

• Opportunity cost

Broad index funds are still tied to the overall economy and interest rate environment. Rising rates, inflation, or economic recessions can impact returns. If you want to take advantage of high interest rates, or need a short-term place to park your money, you might want to consider other products like certificates of deposit (CDs) or high-yield savings.

If you’d like to learn how to invest in index funds despite the associated risks, the following steps can help you get started. However, you may want to do some extra research on what exactly you want to invest in, taking into account all potential risks.

The below information is provided for guidance only and should not be considered investment advice.

To purchase an index fund, you will need some kind of brokerage account. When it comes to where to buy index funds, you can choose from options such as online brokerages (e.g., investing apps), robo-advisors, or retirement accounts.

You may want to look for: low fees, ease of use, access to funds, and customer support. Once you have chosen your broker, follow the instructions to set up your account.

Decide what index fund you want to invest in. The S&P 500 is a popular example, but there are also other options for different industries, countries, and investment styles. You might want to do some extra research to determine which one best matches your goals and risk tolerance.

Once you have found a fund you like you might want to consider the following:

• Expense ratio: Take a look at the expenses of each fund you're considering. Comparing costs can help you weigh your choices.

• Investment minimums: Some funds may have minimum investment amounts. Consider if you have enough to make the minimum investment, or if you can buy fractional shares at a lower amount.

If you’ve chosen an index fund, now you can proceed to placing your order. Follow the instructions on your account and submit your order. 

If you have a large sum of money to invest, you can consider a lump sum investment. However, if you prefer a more gradual approach, dollar-cost averaging (investing a fixed amount of money at regular intervals) might help you build a more consistent investing habit.

Index funds and ETFs are both low-cost, diversified investment options that passively track a market index, making them popular amongst long-term investors. The main difference lies in how they’re bought and managed. 

Index funds are purchased at the end of the trading day at the fund’s net asset value (NAV) and may be suitable for automated investing, such as regular contributions to retirement accounts. ETFs, on the other hand, trade like stocks throughout the day, allowing investors to buy or sell at real-time prices. They often have slightly lower expense ratios and tend to be more tax-efficient due to their unique structure.

For many investors, the choice depends on personal preference and investment style. Index funds might be an option for hands-off investors who want simplicity and automatic investing without worrying about market timing. ETFs on the other hand, could be a consideration for those seeking more flexibility, lower costs in some cases, or better tax efficiency — especially in taxable accounts. 

Both options can be tools to build wealth over time, and some investors even use a mix of both to balance convenience and control. In the end, the best option for you is the one that most closely aligns with your goals, but both can help make up your asset allocation.

Index funds are a simple and cost-effective way to participate in the market’s long-term growth without having to pick individual stocks. By tracking well-established indexes, they offer broad diversification and lower fees than most actively managed funds. Learning how to invest in index funds doesn’t have to be complicated. Whether you invest through a brokerage account, robo-advisor, or retirement plan, starting with small, consistent contributions can help you build wealth steadily over time.

Beyond investing in index funds, there are other ways to grow your savings and Raisin is here to help. The Raisin marketplace gives you access to a variety of high-yield savings products with competitive interest rates to help boost your savings. Explore account types, compare rates, and sign up today to start maximizing your savings potential!

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

¹www.macrotrends.net/2526/sp-500-historical-annual-returns