Index Funds Explained for UK Beginners
Index funds are the most recommended investment for ordinary investors — endorsed by Warren Buffett, countless financial advisers, and decades of academic research.
What Is an Index Fund?
An index is a list of companies grouped by some criteria. The FTSE 100 is a list of the 100 largest UK companies. An index fund automatically buys all the companies in that index in proportion to their size. When you invest in a FTSE 100 index fund, you own a tiny slice of all 100 companies.
Why Index Funds Beat Most Active Funds
Roughly 85% of actively managed funds underperform their benchmark index over a 10-year period after fees. Index funds simply track the market at much lower cost, meaning more of the returns stay in your pocket.
Popular UK Index Funds
| Fund | What It Tracks | Annual Charge |
|---|---|---|
| Vanguard FTSE All-World (VWRL) | 3,600 global companies | 0.22% |
| iShares Core MSCI World (SWDA) | 1,500 developed market companies | 0.20% |
| Vanguard FTSE 100 | 100 largest UK companies | 0.09% |
| Vanguard LifeStrategy 80% | Global stocks and bonds mixed | 0.22% |
How to Buy Index Funds in the UK
Open a Stocks and Shares ISA with Vanguard, Freetrade or InvestEngine. Transfer money in. Search for the fund by ticker symbol. Buy it. Set up a monthly direct debit to invest regularly.
The Most Important Rule
Do not sell during market crashes. The market has always recovered from every crash in history. The people who lose money are those who sell at the bottom and buy back at the top.
Your capital is at risk. The value of investments can fall as well as rise.