What to look at when choosing an index fund?

What factors should I consider when selecting an index fund? - Anonymous

Selecting an index fund is a straightforward process if you focus on two key parameters: expense ratio and tracking error.

The expense ratio is crucial because a lower fee directly translates to higher returns over time. For example, if one fund charges 0.10 per cent and another 0.25 per cent, the former will yield better returns, all else being equal.

Tracking error measures how closely a fund replicates its benchmark index. A lower tracking error means the fund's performance is almost identical to the index, which is ideal for index investors.

To conclude, when choosing an index fund, prioritise the one with the lowest expense ratio and minimum tracking error to optimise your returns.

Also watch: How to choose index funds?

This article was originally published on September 04, 2024.