Summary: ​Index funds are becoming a popular investment choice for many New Zealanders. Championed by leading KiwiSaver schemes Simplicity and  SuperLife, index funds are widely available to everyday investors. Offering a low-fee, no-hassle way to invest money, index funds are arguably one of the easiest and wisest long-term investments.

Index funds are easy to buy. In this guide, we explain how to buy index funds and highlight must-know tips for investing. We cover:

• Pros and cons of index funds
• Getting started and investing in index funds
• Best index funds with low costs
• Other important things to be aware of

Disclaimer: Our top 5 index fund list, published below, is journalistic in nature and only highlights low-fee options. It does not endorse the providers, nor does it constitute financial advice. The funds below are largely growth-focused investing in New Zealand and/or overseas and are seen as long-term investments that carry a varying degree of risk.

​Looking for other ways to invest? Check out our guide to investing in shares.

Buying into an index fund is usually a lot easier than picking individual shares. Yet it can be hard to know where to start. We believe it's a three-step process, which we outline in detail:

1. Decide where to buy. In New Zealand, there are a number of platforms and specialist index fund investment companies. To find the right one for you, you’ll need to look at the fund selection and fees.
2. Pick an index fund that you want to invest in. Funds available track well-known indexes like the NZX 50, ASX 200, S&P 500 or specific industries (with property being a popular example).
3. Check the investment minimum and ongoing other costs. Find the right fund for your budget.

When you’re choosing where to buy an index fund, consider, there are a few things to consider:

1. Fund selection: Do you plan to invest in one fund, or many? Platforms like InvestNow have a range of local New Zealand and overseas-focused funds, whereas Simplicity and Kernel Wealth have between three and five that focus on New Zealand. Hatch Invest offers American exchange-traded index funds.
2. Access and management: Do you want to have access to research information to help you decide on funds? InvestNow, for example, has access to Morningstar’s database of investments which lets you examine and compare different aspects of their funds both in real terms, and relative to category peers. Other platforms may just list their funds and not offer comparisons. What platform you select depends on how involved you want to be as an investor, and how much research you want to do.
3. Fees: We discuss management and membership fees below in step 3. Management fees are always a percentage of your fund, e.g. 0.30%. Membership fees are also charged by some platforms. Generally, the more you invest, the less the membership fees affect your net results. For example, if you’re investing $1,000, $30+ year in membership fees equate to a 3% cost. If you invest $10,000, that drops to 0.30%. 

MoneyHub does not offer or publish financial advice, so the best approach is to do your own research as to what fund is most appropriate for your needs. Things to consider include:

1. Location: Do you have a preference for what country you invest in? There are plenty of New Zealand index funds that follow the top 10, 20, 50 or more companies. If you want to invest in the USA, there are hundreds of funds on platforms like Hatch Invest.
2. Company size: The market capitalisation of a company determines if it is included in an index or not. Market capitalisation is simply the number of shares issued multiplied by the share price. As the share price rises, the market capitalisation increases (and vice versa). Do you have a preference for small companies, mid-sized or big ones? Many funds track the biggest 50 or 200, but other funds invest in smaller growth companies.
3. Business sector or industry: The choice is endless, with funds that invest in technology, bonds, cash, emerging markets, property and many more. 

Low fees and index funds go hand-in-hand and are one of the reasons so many people invest in them. However, not all index funds are ‘cheap’. Two funds that have the same investment profile, like following the NZX 50, may have different management fees:

• One example is the Simplicity NZ Fund, which tracks the NZX 50 and charges 0.10% p.a.
• Other NZX 50-tracking funds charge 0.35% p.a. or even more. While the difference seems small, over time it adds up when considering the compounding effect of money.
  

 
Before you invest, check the following:

1. The investment minimum: Some funds let you buy in with as little as $1, while others require $5,000 (or more). Funds that require more to invest are not necessarily ‘better’, and the minimum is often set to minimise administration costs. If you are starting out and don’t have thousands to invest, look for a fund that has a low minimum investment.
2. Management fee: This is the major cost that is deducted from each fund by investment managers. It’s almost always a percentage of your investment. For example, 0.50% or 0.30%. For context, most index funds charge between 0.10% and 0.60%, with the average being around 0.30% to 0.40%. Bond and cash index funds usually, but not always, charge less than index funds that invest in shares.
3. Membership fee: Some platforms, such as Sharesies, Simplicity and Kernel Wealth all charge monthly membership fees. Others, such as Hatch Invest and InvestNow, do not. These ongoing fees can add up, especially if your index fund is small, so should be considered before picking a platform or provider.
4. Tax benefits: Check the index fund is a PIE. If it is, there are tax incentives to be had; you could reduce your top rate of tax significantly depending on your top tax bracket e.g. 33% to 28%, 30% to 17.5%. See our table below.

Looking for other ways to invest? Check out our guide to investing in shares.

PIE Tax Benefits Explained
PIE rates saves you money, even if you are not on the top tax rate. PIR rates are as follows:

• total income including PIE is < $48,000 PIR is 10.5%
• total income including PIE is < $70,000 PIR is 17.5%
• total income including PIE is > $70,000 PIR is 28%

 
These PIE rates compare to standard PAYE tax rates as follows:

• For every dollar of income up to $14,000 apply tax rate 10.5%
• Between  $14,000  and  up to $48,000 apply tax rate 17.5%
• Between $48,000 and up to $70,000 apply tax rate of 30%
• Above $70,000 apply tax rate of 33%

 
Therefore it is not only the top tax rate people who benefit. PIE tax advantages offer something for anyone earning over $14,000.

Want to compare the pros and cons of index funds (passive) with actively managed funds? Our Passive Investing vs Active Investing guide has you covered.

While the NZX continues to power ahead, there are many other index funds on offer to anyone resident in New Zealand. We have listed five index fund providers that have some of the lowest fees. In 2019, nearly 30% of any money invested in the USA tracked indexes, and we believe New Zealand is moving (slowly) in that direction.

Our top five index fund list offers diversity and low fees, and include both local and overseas opportunities. Please note, this list is journalistic in nature and only highlights low-fee options and does not endorse the providers, nor does it constitute financial advice. The funds below are largely growth-focused investing in New Zealand and/or overseas and are seen as long-term investments that carry a varying degree of risk.

Popular low-fee options include:

Index funds have become one of the most popular ways for New Zealanders to use due to their low-cost, diversity and returns that typically beat active funds. To make sure you invest in an appropriate fund, we suggest making a few additional considerations:

1. Is the index fund performing? New Zealand law requires the index fund to show it’s performance beside its benchmark. The returns won’t be identical (due to fees) but should be similar. For example, if you were in an NZX50 tracking fund and the index went up 10%, your fund’s performance should be similar. If the fund performance drags behind the index it tracks by more than the fees percentage, something probably isn’t right.  
2. Are you new to investing? If so, don't rush. This guide explains the basics to let you navigate to reach your financial goals.
   
3. Financial Advisers don’t often recommend index funds, although there are exceptions. Read more about Financial Advisers here.
4. How much will you need to retire? Use our retirement calculator to track your progress.