An index fund is a basket of securities set up to mirror the performance of a market index, such as the S&P 500®.2 The money you put into a fund buys shares in the companies that make up the index that fund is tracking. Index funds can be a low-cost and low-maintenance way to potentially grow your savings in an investment account, such as a brokerage account;, IRA, HSA, 529, or 401(k) plan. Here's how to buy index funds.
Decide on your index fund investing goals
Finding the right index fund starts with understanding your investment goals. That's because the type of account you need will depend on those goals. For instance, preparing for retirement requires a different kind of account than saving for your child's college education. You'll put money into each account—from your own savings and/or contributions from an employer—and it's then invested into securities like index funds until you're ready to cash out. The goal? To help your money grow while you wait.
No matter which type of account you need, the financial institution where you open your account should offer diverse investment options, low or no commissions, minimal fees, an account minimum that you can afford, and easy online or mobile access to the account.
Here are some options you may use for index fund investing, depending on your investment goals:
Saving for retirement- Employer-sponsored retirement plan: These types of plans include 401(k)s, 403(b)s, and 457(b)s. Contributions are tax deductible, with an annual employee contribution limit of $23,000 in 2024 for those under age 50, and an extra "catch-up contribution" of $7,500 for those over 50 in 2024. Earnings growth is tax-deferred until withdrawn at retirement.
- Individual Retirement Account (IRA): Traditional IRAs allow you to deduct contributions from your taxable income if your modified adjusted gross income (MAGI) is under the IRS limits. In 2024, the annual contribution limit increased to $7,000 for those under age 50, and an extra "catch-up contribution" of $1,000 for those over 50 in 2024. Earnings are tax-deferred until retirement and then withdrawals are taxed at the ordinary income tax rate.
- Roth IRA or 401(k): If your income is below the IRS limit, you can contribute to Roth versions of IRAs and 401(k)s, which have the same contribution limits as non-Roth versions, but they are funded with post-tax, instead of pre-tax, dollars. With a Roth, earnings grow tax-free, and withdrawals are tax-free, provided the first contribution is at least 5 years old, and you reach age 59½. Even though anyone who reaches the age of majority in their state (not including Roth IRA for Kids) can open a Roth IRA,3 only those with earned income within the IRS annual limits are eligible to contribute.
- 529 plan: These tax-advantaged accounts are designed specifically for education savings. Contributions to the account are post-tax dollars, and any earnings grow federal income tax-deferred. As long as the money is used for qualified education expenses, withdrawals are tax-free.
- UGMA/UTMA custodial account: Parents can contribute post-tax dollars to one of these accounts in a child's name, and it is an irrevocable gift to the minor. At the age of majority in their state (typically between 18 and 25, depending on the state), the assets transfer to the child. Prior to that, however, funds can be accessed as long as they are used for the benefit of the child. Though they're taxable, custodial accounts for children receive preferential tax treatment. In fact, unearned income up to $1,300 in 2024 is not taxed, and the next $1,300 is taxed at the child's tax rate, which tends to be lower than the custodians'. Once the assets have been transferred to the child at the age of majority, they can withdraw the funds for any purpose. Learn more about custodial accounts.
- Custodial Roth IRA: If your child has earned income, you can set aside up to the amount they've earned or the IRA contribution limit of $7,000 (whichever is less) into a custodial Roth IRA. Contributions are not tax-deductible, the money grows tax-free, and your child can access the money, tax-free, in retirement or in other qualifying situations, such as qualified education expenses or for their first home purchase.4
Saving for health expenses
- Health Savings Account (HSA): This kind of account allows you to set aside pre-tax dollars for future health care expenses. You may only contribute to an HSA if you are enrolled in an HSA-eligible health plan. The 2024 contribution limit is $4,150 for an individual and $8,300 for a family. The money rolls over from year to year, and there's no tax on growth or withdrawals for qualified medical expenses.
Saving for something else—or you've already maxed out contributions to your tax-advantaged accounts
- Taxable brokerage account: This type of account doesn't offer tax advantages, but it provides more flexibility and fewer restrictions than tax-advantaged accounts.
Figure out what index funds you want to invest in
Once you've chosen your account type, you need to choose an investment type. There are many different types of indexes and index funds available. Deciding which ones are best for you depends on your investment objectives, since the goals of each index fund differs. Here are some common types of index funds, and what investment goals they may be a good fit for:
- Broad market funds: These funds attempt to mirror indexes that include a large number of securities that may be indicative of the general market. The fund's prospectus or research page will tell you which index they are intended to track. These funds' broad exposure provides diversification within an asset class—as in, your entire index fund's value might not dip as much as any one stock or set of stocks in a particular industry in the index at a given time—but it also means you may not benefit as much when a particular stock or set of stocks rises. Broad market indexes are generally used for long-term investing.
- Sector funds: If you're interested in investing in a specific industry or market, a sector index fund can give you exposure to dozens if not hundreds of securities within a single sector. This kind of index fund can be riskier than a broad market fund since your assets could be impacted by industry-specific disruptions. However, you're also better able to capitalize on any upswings within that industry. Investors generally choose specialized funds if they're looking for targeted growth.
- Domestic funds: Putting your money in a fund that invests in US-based public companies that make up an index.
- International funds: An international fund invests in companies outside the US. Since those markets might rise and fall on different patterns than domestic markets, international funds can help diversify your portfolio and help lessen the effect of the American economy's volatility. Remember that there could be stark differences between developed foreign funds (say, those investing in markets of developed nations) and emerging market funds (those investing in markets of still-developing nations).
- Bond funds: This type of index fund invests in bonds, rather than stocks. This means investors generally receive dividends or interest, and they often pay every month rather than on a semi-annual basis. That could be a good fit for investors interested in receiving regular income.
Depending on your specific investment goals, you may decide to invest in a mix of index funds, rather than choosing just one. Whichever fund or funds you're interested in buying, be sure to note the 5-letter symbol (3-letter or 4-letter if it's an exchange-traded fund instead of a mutual fund), so you can find them in a fund listing when you're ready to invest in them.
Determine how hands-on you'd like to be
There are several ways to invest in index funds, depending on how actively you want to manage your investments:
- DIY: Active investors can easily buy and sell index funds themselves through a brokerage account. It will be up to you to determine which index funds best fit your needs and monitor the funds' performance. If you're investing through a company-sponsored plan like a 401(k), you'll likely have a small selection of funds to choose from.
- With active help: Working with a financial professional can help investors who'd like guidance. The professional can generally walk you through which index funds may be a good fit for your goals, and, in some cases, handle the buying and monitoring for you.
Figure out how much money you want to invest in index funds
To determine how much to invest in index funds, calculate the amount you can comfortably afford to invest. This could be a portion of what's left of your take-home pay after your essential expenses, including health insurance payments and minimum payments on debt, are covered, and you've built up at least $1,000 then working toward 3 to 6 months' worth of expenses for emergency savings. Just know some funds require a certain amount to buy in, aka an investment minimum, but many don't.
In addition to your initial spend, consider any fees that could come out of your return to pay to maintain the fund over time. Since the goal of an index fund is to match the performance of the index it tracks, it doesn't require a lot of regular hands-on management, and its fees are often lower than those of actively managed funds. That said, some funds charge higher fees than others—and that can cut into your returns down the road.
Considerations when buying index funds
If you have decided which index funds you want to invest in, select a dollar amount to buy (or a number of shares you want, then do the math to turn that into a dollar amount) from your investment account. While exchange-traded index funds (ETFs) will often require you to purchase full shares, mutual funds generally allow for fractional shares. (Fidelity offers fractional shares for both ETFs and mutual funds.) Another difference between mutual funds and ETFs: ETFs have intra-day pricing, like stocks, whereas mutual funds only have end-of-day pricing.
Many index fund investors choose to set up recurring investments to take advantage of dollar-cost-averaging. This can serve as a risk management trading strategy if you end up buying more shares when the price is relatively lower and buying less when the price is relatively higher.
How to buy index funds at Fidelity
One way to buy index funds yourself if you already have an account with Fidelity:
- Log in
- Research potential investments in index funds using Fidelity's Mutual Funds Research Page, which allows you to select "Index" under "Key Criteria" > Management Approach. You can also look at the ETF Screener and choose the "Passively Managed" option under "Investment Philosophy."
- From the individual security's research page, select "Buy."
- Enter the number of shares you'd like to buy of that index fund.
- Select "Preview order."
- Check that the details you've entered are correct, or select "Edit" to make changes.
- Select "Place order."
- Repeat from step 1 if you'd like to buy more index funds.
Fidelity account holders are able to place trades in their Fidelity app too.
Don't forget to check in on your index funds
It's smart to check in at least annually to make sure your investments are progressing how you want them to. Rebalancing your portfolio every so often helps ensure your investments stay aligned with your goals.
It's also a good idea to plan for how you will eventually sell your index funds and handle the potential tax implications when you do.