Get an Introduction to Index Funds

If you buy shares of an index fund that tracks the S&P 500, a fund manager takes your money (pooled with that from other investors) and uses it to buy stock in the 500 companies that make up the S&P 500 (or a representative sample of those 500 companies). Over time, your returns would generally mirror the gains or losses of the S&P 500 itself.

The benefits of investing in index funds

Index funds offer many benefits over investing in individual stocks and bonds or even actively managed mutual funds.

• Few barriers to entry. Getting into an index fund is relatively easy, and most have a low minimum initial investment.


• Diversification. When you buy a share of an index fund, your risk is spread across a wide range of companies, industries, and asset types, so you're not as susceptible to dramatic swings in a single company's stock price.


• You won't dramatically underperform the market. Since index funds track a market index, your returns will be roughly equal to whatever index you're invested in — not more, but not significantly less either.


• Low fees. Because index funds are passively managed, their operating expenses are lower than those of actively managed mutual funds.1 This means you'll generally have less fees eating into your investment returns.


• Tax efficiency. When you invest in an actively managed mutual fund, the fund manager buys and sells securities all the time hoping to make a profit. If you hold the investment in a taxable account, this can generate taxable capital gains, and paying taxes on those capital gains cuts into your after-tax profits. When you invest in an index fund, the holdings only change when the index changes, which could result in lowering your tax burden.

The downsides to investing in an index fund

Investing in an index fund can have some downsides.

• You won't "beat the market." Index funds are designed to match the performance of the index they track, so you may not be able to benefit from the performance of a particular company or sector as you're invested in a wide range of assets. In other words, you won't get lucky and outperform the market.


• Tracking errors are possible. An index fund might not perfectly track its index — especially if it only invests in a sample of the securities in its market index.


• Not flexible. What's in your index fund will only change if the index changes, so you don't have opportunities to choose how money is invested.

Should you invest in index funds in a taxable account or tax-advantaged account?

Because index funds usually have lower turnover rates, they don't generate as much capital gains. The capital gains they do generate tend to be long-term capital gains that are taxed at a lower rate, so they're often a good fit for taxable accounts.

Financial advisors generally recommend holding less tax-efficient investments, such as mutual funds or fast-growing stocks, in tax-advantaged accounts.2 That way, you won't lose more of your returns to taxes.

Of course, those are just general guidelines. If you want personalized advice tailored to your unique situation, reach out to an experienced Synovus financial advisor. They can help you select a solution in line with your goals and investment vehicles to meet your wealth-building targets.

* Diversification does not ensure against loss.