While the following content is intended to be educational, it does contain promotional material for Kaldi.

If you’ve ever thought about investing but didn’t fancy spending your evenings researching stocks and shares, index funds might be a better fit. They’re built to track the wider market, so you’re not trying to outguess it (nor do you even need to super understand it). For a lot of investors, that makes them one of the simplest ways to start, and one of the easiest to stick with.

What are index funds?

An index fund is a type of investment fund that tracks a market index, such as the FTSE 100 or a global stock market index. Instead of picking individual companies, it buys a slice of all (or most) of the companies in that index.

That means if the market rises over time, your investment tends to rise with it. You’re not trying to beat the market or guess which company will win big next. The aim is to grow your money in line with the broader market.

So when you say index, you mean …

Think of the Argos catalog. Or Amazon, even. You use one of them and they pretty much have everything indexed, from toys and games to furniture and electronics. It’s similar with index funds, only your index is made up of the likes of Apple, Tesla, Nike – all the big hitters. And when they do well on the stock market, so do you.  

Why index funds suit many investors

One reason index funds are popular is down to the  cost. Because they simply track an index rather than relying on a fund manager to choose stocks, fees are usually lower. Over many years, those lower fees can make a noticeable difference to what you keep.

They’re also straightforward to understand compared to many other ways of investing. You know what you’re investing in because it mirrors a specific market. If it’s a UK index fund, you’re invested in UK companies. If it’s global, you’re spread across markets around the world. Having that clarity makes it easier to stay invested when markets move around.

How to invest in index funds in the UK

In the UK, you’ll usually invest in index funds through a Stocks and Shares ISA or a General Investment Account. An ISA is often the first choice because any growth or income is sheltered from tax, up to your annual allowance.

Some platforms let you start with relatively small amounts and invest monthly. You choose a fund that matches your risk level, be it low, medium or high. Then you set up a regular payment and let it run. Or you can choose to pay in when you wish. 

The aim here isn’t timing the market. It’s staying invested long enough for compound growth to do its work. And if you want to know more about compound growth, check out our guide here.

What does “set and forget” really mean?

Setting it and forgetting it doesn’t mean you won’t ever look at your investment again. That wouldn’t be very helpful. What it does mean, however, is that you’re not reacting to every headline or trying to jump in and out of the market. 

With an index fund, the idea is consistency. You invest regularly and pretty much leave it alone, giving it time to do its thing. Markets will go up and down in the short term. That’s normal. The “forget it” part is about resisting the urge to tinker, especially when things feel uncertain.

Uncertain, you say?

That could be anything from a little wobble in the UK economy to a global event that sends markets down for a while. It can feel uncomfortable when you see your balance reduce. But index investing is built on the idea that markets recover over time, pretty much all the time. Staying put through those periods is often what separates steady growth from missed gains.

Can you give me an example?

Take a global index fund. If you’d invested just before a market dip, your balance might have fallen in the first year. That’s the part that tests people. But zoom out five or ten years and the picture often looks very different.

For example, if someone invested £200 a month into a higher-risk fund such as Vanguard LifeStrategy 100% Acc, which represents the higher end of the risk range available, and earned between 7.57% and 11.49% interest, after 10 years they’d have put in £24,000. With potential growth between approximately £35,700 and £44,600. Not guaranteed, of course. Markets don’t move in straight lines. But it shows how time does most of the heavy lifting.

Past performance is not indicative of future results. Markets move, values go up and down, and you could get back less than you invest. Figures shown show a range of possible outcomes based on historical performance of Vanguard LifeStrategy 100% Acc fund. Please go to kaldiapp.co.uk/example-fund for more information on this calculation. Total returns are listed after fees.

How index funds work inside Kaldi

With Kaldi, investing in an index fund doesn’t mean opening a separate platform and wiring money across. You open a General Investment Account or Stocks and Shares ISA in the app, choose a fund that matches your comfort with risk and that becomes your chosen home for growth.

From there, your money flows in naturally. You can top up with cash, earn cashback from over 160 brands and use round-ups and monthly sweeps to contribute regularly. When you invest, Kaldi places an order through our investment provider to buy units of your selected index fund in your name. If you stick with one fund, each time your cashback buys more of the same thing, keeping it simple.

Behind the scenes, the fund is run by the fund manager and tracks its chosen index. Your investment rises and falls with that market, minus fees. And as with any investment, your capital is at risk and the value can go down as well as up, so you could get back less than you put in.

Are index funds right for everyone?

Index funds suit people who want a simple, low-cost way to invest without spending hours managing it. If you’re happy to invest for the long term and can cope with some ups and downs along the way, they can be a solid foundation.

They’re not magic, though. Your money will still rise and fall with the market, and there will be periods when returns are flat or negative. The trade-off for simplicity is accepting that you won’t beat the market in spectacular fashion. You’ll move with it. For many investors, especially if you don’t know much about investing, that’s more than enough.

Let the market do the work

You don’t need to chase the next big thing with index funds. They function to give your money a simple job, letting time handle the rest. Taking this steady approach often beats second-guessing every market move. Start small and stay consistent, like letting your every day shop earn cashback which can be put into the fund. Let compounding do its thing as your money builds over time.

Capital is at risk when investing. The value of your investments can go up or down, and you may get back less than you put in. Kaldi doesn’t offer personal financial advice, so if you’re unsure whether investing is right for you, it’s worth speaking to a qualified financial adviser.

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