Investing in index funds can be a very profitable activity when done right. Many investors are using this strategy profitably, and there are many different funds available to pick from. However, while you can make money using this method, just remember that it is not as profitable as the mutual fund companies would have you believe.
First of all, diversification is not the best method to prevent risks, despite popular opinion. Becoming financially educated is the best way to reduce your risks. The top individual stocks always provide a greater rate of return than the top funds, and this is an important point to remember. The best funds will not do any better than the index at large performs. A lot of people will point to the fact that indexes generally go up around 10 annually, which is quite good.
The problem is, they do not factor into the equation inflation and taxes, which eat into the profits. Therefore, the initial 10 might go down to 5-6 when all is said and done. However, having said that, funds are best for people who do not have tons of time to learn about investing.
For some people, stock based funds are the best, because bond funds do not offer more than a 5-6 return on investment. On the other hand, stock based funds can make as much as 10 annually, and in some cases more.
However, if the market is already at a very high price and you believe a crash is coming, a bond fund would be a good investment to limit your losses. For this reason, it might be wise to invest in stock funds when the market is low, and bond funds when the market is high.
The bottom line is, investing in index funds is not as profitable as going for specific stocks. However, for certain investors it is the right move. The important thing is that you take your time, compare the index investing funds, and find the ones with the best return on investment.