Quora Answer: What is the Best Way to Select Index Funds for Investing?

The following is my answer to a Quora question: “What is the best way to select index funds for investing?” 

When you pick an index fund, there are a few things you need to consider.  They pertain to your investment strategy and horizon, and the technicalities of the fund.  Any investment must have a strategy, and that strategy should have some form of investment horizon.  You choose the fund that suits this best. 

Once you have identified the funds, consider their expense ratios.  These are the fees that cover the operating expenses of the fund.  There is a cost to managing the fund.  Some funds charge more than others, and while going for the cheapest fund is not always the best, funds with lower expense ratios tend to be larger, and they tend to be more efficiently run.  Funds are not very transparent with expense ratios since there is rarely a breakdown.  What you get is a percentage deduction of fund assets.  If you are invested over a long investment timeline, the difference in fees can be in the hundreds of thousands of dollars or more.  That eats into your gain. 

While past returns are not an indication of future performance, they are an indication of the qualities of the investment committee and managers.  Good people are consistently good.  There should be an upward trend over an extended period, barring periods of economic challenges or shocks to the market.  Pay attention to who manages your investments. 

When you build your portfolio, diversify across industries, regions, and markets.  This builds a resilient portfolio.  Have a good mix between debt instruments and equity.  Generally, a 60% weightage towards equity s a good start.  Consider beginning at the lowest common denominator.  What I mean is that people go looking for gold, when the guaranteed money is in those who sell gold prospectors the shovels.  Look for those shovels, the basics that are always required whether the economy goes up or down, and build your portfolio from there.