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Introduction to Index Fund

Posted on the January 22nd, 2009 under Investment, Savings, Retirement by (Beaulife) Altis Lo

An index fund is a mutual fund that buys securities that represent some index. As an example, if we were to take the S and P500 index, an index fund that was representing that index would buy those 500 securities in the same relative weighting as the index has those securities. It’s really just implementing that index with real stocks.

Watch this video for some understanding:


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One of the good advantages of an index fund is they tend to have really low expense ratios and they have very low turnover, which are key factors when looking at the quality and the long term expected returns of a mutual fund.

In Malaysia, the invested stocks for Index Fund in any companies of mutual fund and unit trust fund, are subset of KLCI (Kuala Lumpur Composite Index) under Bursa Malaysia. For example, an Index Fund could be investing 80 out of 100 stocks in KLCI. In short, only 80% of the investors’ money are transacted in the stocks in KLCI, the balance 20% are safely deposited in fixed deposits, bonds, and other means.

If you are interested in the companies list of KLCI, just click here for the constituents of KLCI.

Just to share with you about the top 25 companies in KLCI by market capitalization, they are:
1 Sime
2 MISC
3 PBBank
4 Maybank
5 Tenaga
6 IOICorp
7 Commerz
8 PetGas
9 DiGi
10 PLUS
11 Genting
12 TMI
13 Resorts
14 BAT
15 YTL
16 YTLPowr
17 PPB
18 TM
19 KLK
20 RHBCap
21 HLBank
22 PetDag
23 AMMB
24 BJToto
25 Nestle

The companies listed here may not necessary show in the constituents of KLCI, because the above list was based on the market price on 19th December 2008, while the constituents of KLCI was based in 1977, when it was more than 30 years ago.

The idea of Index Fund is basically to track the performance of KLCI as close as possible, hence it may not be necessary to appoint fund manager(s) for it, besides, the Index Fund should not over- or under- perform when comparing with the trend of KLCI.

Technorati Tags: Ammb, Bat 15, bursa malaysia, composite index, Constituents, Expense Ratios, Fixed Deposits, Genting, Hlbank, index fund, Ioicorp, KLCI, Klk, Kuala Lumpur, Kuala Lumpur Composite Index, Market Capitalization, Maybank, mutual fund, P500, Pbbank, Sime, Stock Markets, unit trust, unit trust fund

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