A Complete Guide to Index Investing

By Klnam Kurt •  Updated: 10/06/24 •  6 min read

Index investing is popular in South Africa because of its simplistic, inexpensive nature and long-term growth potential. In this investment, one does not necessarily go the usual route of stock picking but instead acquires a fund mirroring the performance of a broader market index, such as the JSE All Share Index. The strategy gives investors diversification and exposure to the general growth of the market at less risk than investing in individual companies. This makes index venturing an attractive and cost-effective avenue into the equity market for an increasing number of South Africans who seek to grow their wealth.

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What is Index Investing?

Index investing means investing in a fund that follows the performance of a specific stock market index. In South Africa, this comes by trying to track an index that represents the success of the top-performing companies on the Johannesburg Stock Exchange- a collection such as the JSE Top 40 Index or the JSE All Share Index. The idea is to strive for a yield representative of the overall market or segment.

Inside an index scheme is a diversified portfolio of stocks, and over time, when the companies in that index do well, so does your venture. Because it limits active management, this venture is cost-effective and less headache for you. Instead of chasing some threads of stock that might outperform the market, index investing tries to take much larger cuts at attempting to capture the overall market return. This makes a lot of sense for the long-term investor looking to build wealth with less drag from costs.

How Do I Start Investing in Indexes?

It is relatively easy to start index investing in South Africa, and one need not have a great deal of money as an investment to get started. Here’s how:

How Do You Make Cash From Index Funds?

Two significant ways to receive money from index funds in South Africa are through capital appreciation and dividends.

How Much Cash Does One Need to Invest in Index Funds?

The most striking feature of this venture is how inclusive the practice has been for investors with varied capital levels. On most platforms, it begins with an investment as low as R500. You can start small, but your long-term return is directly related to how much you invest and how often you put money into the portfolio. With the magic of compounding, small amounts added regularly will grow into a sizeable total. Even though the total at the beginning of an investment portfolio can be small, increasing the contribution over time will go a long way towards improving its growth potential.

Is There a Downside to Index Funds?

While finally, index investing has widely been regarded for its simplicity and low cost as chief advantages, some downsides exist:

How Long Should Money Be in an Index Fund?

Index investing is a very long-term game – most financial experts recommend letting the money lie for five to ten years or even more. This gives you the benefit of compound growth and smooths out the fluctuations in the market over the short term. Just like any economy, those of South Africa would have growth and contraction cycles. However, the stock market has usually continued north for more prolonged periods.

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