If you have been reading investment books, you must have come across index fund in at least one of these books. What exactly is an index fund?
Quoting Investopedia,
“An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets.
(Investopedia Definition Link)”
In short, index fund is a type of mutual fund that tracks a market index. An index fund will buy shares of companies that are included in the said index. The proportion of each company is weighted according to the index too.
Why index fund?
As mentioned by Investopedia and probably the investment books that you have read, the major benefit of index fund is its low fee structure. For example, Vanguard (the first company in US to offer index fund) offers 0% sales charge and average expense ratio of 0.08% (Link). Furthermore, the fluctuation in price of index fund is usually quite muted (but it depends on which index it is tracking). There exist a lot of funds that track different indexes. If you are interested in index fund, make sure that the fund tracks the correct index.
Index fund in Malaysia
After searching through the internet, I found the following funds:
| Fund | Index tracked | Sales charge | Expense ratio |
| AMB Index-Linked Trust Fund | FTSE Bursa Malaysia KLCI (FBMKLCI) | 4%* | 1.45% |
| CIMB-Principal KLCI-Linked Fund | FBMKLCI | 5.5%* | 1.27% |
| PMB Shariah Index Fund | FTSE Bursa Malaysia EMAS Shariah Index (FBMSHA) | 6%* | 0.84% |
| Public Index Fund | FTSE Bursa Malaysia Top 100 Index (FBM 100) | 5.5% | 1.56% |
| RHB KLCI Tracker Fund | FBMKLCI | 1% transaction fee (Buy & sell) | 1.76% |
*The sales charge is only 1.75% in Fundsupermart.
Unfortunately, we can see that there is no true index fund in Malaysia. These so-called index funds charge normal sales charge and have comparable expense ratio as actively managed funds. Contrast this with the zero sales charge and low expense ratio of Vanguard index funds. Even if we do not use Vanguard as a comparison, according to an answer in Investopedia, the typical ratio is just 0.25% (Link). How can the 5 funds above compare with the practice in US?
Conclusion
Due to a lack of options to choose from, I do not recommend index funds in Malaysia. I personally do not invest in any of these after due consideration. However, if you are really interested in this type of fund, I suggest you to use Fundsupermart (Link) due to its lower sales charge compared to the fund companies themselves. Every cent saved is a cent earned.