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How to Invest in Index Funds in the UK

Tobi Opeyemi Amure
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How to Invest in Index Funds in the UK

In a nutshell, to invest in index funds in the UK, start by choosing a reliable online brokerage platform that offers a range of index funds, including those tracking major indices like the FTSE 100. Open and fund your account, then select index funds that align with your investment goals and risk tolerance. It’s important to diversify your portfolio and regularly review and adjust your investments as needed.

In this guide on how to invest in index funds in the UK, I’ve compiled essential steps and tips to help you navigate this investment method effectively.

You’ll learn about choosing the right index funds, setting up an account, and strategies for long-term success, tailored specifically for UK investors.

This article was reviewed by Tobi Opeyemi Amure, an investing expert and writer at, and

Quick Steps to Invest in Index Funds in the UK

Here’s a quick step-by-step guide on investing in index funds:

  1. Set up an account with an investment platform: Select an investment platform where you can manage various investments, including index funds, stocks, and bonds.
  2. Complete verification and fund your account: Provide identification, such as a passport or driving license, and fund your account via debit card or bank transfer, ready for investment in GBP.
  3. Opt for a tax-efficient wrapper: Select a tax wrapper like an ISA or SIPP to reduce investment taxes, or choose a General Investment Account (GIA) for certain tax benefits.
  4. Research index funds: Investigate various index funds by analysing their past performance, management fees, and alignment with your investment goals, using resources like financial news, expert analyses, and comparative guides.
  5. Develop an investment strategy: Create a strategy that suits your financial goals, age, and risk tolerance, such as a modified Bogleheads’ three-fund portfolio or a global index fund approach.
  6. Select and purchase index funds on the platform: Use your platform’s web or mobile app to search and invest in chosen index funds, deciding between income or accumulation classes.
  7. Employ pound-cost averaging by investing regularly: Adopt a strategy of regular, smaller investments to leverage pound-cost averaging, reducing market volatility risks.
  8. Regularly monitor and adjust your portfolio: Stay engaged with your investments, monitoring performance and rebalancing as needed to maintain a healthy and effective portfolio.

What Is an Index Fund?

An index fund is a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific market index.

It achieves this by investing in a diversified portfolio of assets, such as stocks or bonds, that mirrors the composition and weighting of the target index.

Index funds are designed to passively track the overall market’s performance rather than attempting to outperform it actively.

Due to their low fees and simplicity, index funds have become a popular choice for long-term investors seeking broad market exposure and consistent returns.

One example of an index fund in the UK is the “Vanguard FTSE 100 Index Unit Trust.”

This fund aims to replicate the performance of the FTSE 100 Index, which represents the 100 largest companies listed on the London Stock Exchange by market capitalisation.

By investing in this index fund, investors gain exposure to a diversified portfolio of leading UK companies, providing a simple and cost-effective way to participate in the growth of the UK stock market.

How Do Index Funds Work?

Index funds work by passively tracking the performance of a specific market index.

Here’s a step-by-step explanation of how they operate:

  1. Index Selection: The fund manager chooses a particular market index to replicate, such as the S&P 500, FTSE 100, or a bond index. The index represents a predefined group of stocks, bonds, or other assets that collectively reflect a specific segment of the financial market.
  2. Portfolio Construction: The index fund constructs a portfolio of assets that closely mirrors the composition and weighting of the selected index. For example, if the index consists of 500 stocks, the fund will hold a representative selection of those 500 stocks in the same proportion as the index.
  3. Passive Management: Unlike actively managed funds, index funds do not rely on a fund manager’s expertise to make frequent buying or selling decisions. Instead, they aim to replicate the index’s performance by holding the same assets as the index, maintaining a “buy and hold” strategy.
  4. Rebalancing: Periodically, the fund will rebalance its holdings to match any changes in the index’s composition. This ensures that the fund remains in line with the index it tracks.
  5. Low Fees: Index funds typically have lower management fees compared to actively managed funds. This is because they require less active management and trading, leading to cost savings for investors.
  6. Diversification: By investing in an index fund, investors gain exposure to a diverse range of assets within the index, reducing individual company or sector risk. This diversification can be a key benefit of index funds.
  7. Market Returns: The performance of an index fund will closely follow the performance of the underlying index, minus any fees or expenses. As the index rises or falls, the value of the index fund’s shares will do the same.

Overall, index funds offer a straightforward and efficient way for investors to gain exposure to a broad market or specific asset class while seeking to match the market’s returns over the long term.

This passive approach has proven to be an effective strategy for many investors looking to build wealth steadily over time.

Index Funds vs Actively Managed Funds

Index funds and actively managed funds differ in their investment approach and management style.

Index funds aim to replicate the performance of a specific market index passively.

They do not rely on active stock picking or market timing and instead hold a diversified portfolio of assets that mirror the index’s composition.

As a result, index funds typically have lower fees, offer broad market exposure, and tend to perform in line with the market they track.

On the other hand, actively managed funds employ a hands-on approach where a fund manager selects and trades individual securities to outperform the market or a benchmark index.

However, actively managed funds often come with higher fees due to the active management involved.

Despite the potential for outperformance, research has shown that the majority of actively managed funds fail to consistently beat their benchmark indices over the long term.

Consequently, many investors opt for index funds as a reliable, cost-effective, and less risky way to invest for the long term.

Index Funds vs ETFs

Index funds and exchange-traded funds (ETFs) share many similarities, as both are investment vehicles designed to track the performance of a specific market index.

However, there are some key differences between the two:

  • Structure: Index funds are mutual funds, which means they are priced and traded once per day at the fund’s net asset value (NAV) after the market closes. In contrast, ETFs are traded on stock exchanges throughout the trading day like individual stocks, and their prices may fluctuate in real-time due to supply and demand.
  • Trading Flexibility: ETFs offer greater trading flexibility than index funds because investors can buy and sell them at any time during market hours at market prices. Index funds, on the other hand, can only be traded once per day at the closing NAV price.
  • Fees: In general, ETFs tend to have lower expense ratios compared to traditional index mutual funds. This is partly because ETFs typically require lower operational costs due to their structure.
  • Investment Minimums: Some index mutual funds may have minimum investment requirements, whereas ETFs have no such minimums. Investors can buy even a single share of an ETF.
  • Dividends: Index mutual funds often distribute dividends to shareholders periodically, while ETFs may distribute dividends more frequently, such as quarterly.
  • Tax Efficiency: ETFs are generally more tax-efficient than index mutual funds, mainly due to the way they are structured. ETFs allow for in-kind redemptions, which can help reduce capital gains tax liabilities.

Both index funds and ETFs are popular investment choices for those seeking market exposure and diversification.

The decision between the two often comes down to individual preferences, trading habits, and specific investment goals.

How to Invest in Index Funds in the UK – Step-By-Step Guide

To buy index funds in the UK, follow these step-by-step instructions:

Step 1: Research and Choose a Brokerage Platform

Research and select a reputable brokerage platform that offers access to a wide range of index funds. Look for platforms that have low fees, user-friendly interfaces, and good customer service.

Step 2: Open an Account

Sign up for an account on the chosen brokerage platform. This typically involves providing personal information, verifying your identity, and agreeing to the platform’s terms and conditions.

Step 3: Fund Your Account

Deposit money into your brokerage account using a bank transfer or other accepted funding methods. Make sure you have enough funds to cover the initial investment amount and any subsequent investments.

Step 4: Conduct Research

Research various index funds available on the platform. Look for funds that match your investment goals, risk tolerance, and time horizon. Consider factors such as the fund’s expense ratio, historical performance, and the index it tracks.

Step 5: Select the Index Fund

Choose the index fund you want to invest in based on your research. Ensure it aligns with your investment strategy and offers exposure to the market or asset class you desire.

Step 6: Determine Investment Amount

Decide on the amount you want to invest in the index fund. Some funds may have minimum investment requirements, so verify that your chosen amount meets the fund’s criteria.

Step 7: Place the Order

On your brokerage platform, find the specific index fund you wish to purchase and place a buy order. Enter the investment amount and review the details before confirming the order.

Step 8: Monitor Your Investment

After purchasing the index fund, regularly monitor its performance and review your investment strategy. Consider setting up automatic contributions to the fund to keep investing regularly and take advantage of potential long-term growth.

Where to Buy Index Funds in the UK?

In the UK, you can buy index funds through various financial institutions and investment platforms.

Here are some common options:

  1. Online Brokerage Platforms: Many online brokerage platforms offer access to a wide range of index funds. Some popular platforms in the UK include Hargreaves Lansdown, AJ Bell Youinvest, Interactive Investor, and Fidelity.
  2. Banks: Some major banks in the UK may also offer their customers the option to invest in index funds through their investment or wealth management services.
  3. Robo-Advisors: Robo-advisors are automated investment platforms that create and manage a diversified portfolio for you based on your risk tolerance and investment goals. They often include index funds in their portfolio offerings. Examples of UK robo-advisors include Nutmeg, Moneyfarm, and Wealthify.
  4. Fund Management Companies: Many well-known fund management companies, such as Vanguard, BlackRock (iShares), Legal & General, and others, offer index funds that you can purchase directly through their websites or other investment platforms.
  5. Workplace Pension Schemes: If you have a workplace pension, it may include index funds as part of its investment options. Check with your employer or pension provider for more information.

Before selecting a platform or provider to buy index funds, compare their fees, services, investment options, and customer reviews to find the one that best suits your needs and preferences.

Additionally, ensure that the platform is regulated by the Financial Conduct Authority (FCA) to ensure your investments are protected.

How to Select an Index Fund?

To select an index fund, start by defining your investment objectives and risk tolerance.

Determine whether you want exposure to a specific market segment or a broad market index.

Next, research different index funds that align with your goals and track the index you’re interested in.

Compare key factors such as expense ratios, historical performance, fund size, and the assets held within the fund.

Lower expense ratios are preferable, as they can impact your overall returns.

Look for funds with a solid track record of closely tracking their respective indices.

Additionally, consider the fund’s diversification and the companies or assets it holds.

If possible, opt for funds with a larger number of holdings to reduce individual company risk.

Lastly, choose a reputable fund provider with a strong track record and a good reputation for customer service.

How to Use ISAs and SIPPs When Investing in Index Funds?

Using Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs) can be advantageous when investing in index funds in the UK.

Here’s how you can utilise both tax-efficient accounts:

  1. ISAs:
    • Contribution Limit: Each tax year, you can invest up to a certain amount in an ISA (the annual ISA allowance). The current allowance is £20,000 per individual.
    • Tax Benefits: Any gains or income generated within an ISA are tax-free. This means that you don’t have to pay capital gains tax on profits or income tax on dividends or interest earned from your index fund investments.
    • Investment Flexibility: You can use your ISA to invest in a variety of assets, including index funds. Choose a platform that offers a selection of index funds that align with your investment goals and risk tolerance.
    • Long-Term Savings: ISAs are an excellent tool for building tax-efficient long-term savings, making them a popular choice for retirement planning and other financial goals.
  2. SIPPs:
    • Tax Relief: SIPPs offer tax relief on contributions. When you contribute to your SIPP, the government adds basic rate tax relief, boosting your investment. Higher-rate taxpayers can claim additional tax relief through their tax returns.
    • Investment Options: Similar to ISAs, SIPPs provide a wide range of investment options, including index funds. You can tailor your SIPP portfolio to include various index funds to create a diversified retirement savings strategy.
    • Long-Term Retirement Planning: SIPPs are designed specifically for retirement savings. The funds within your SIPP grow tax-free, providing a tax-efficient way to build a nest egg for your retirement.

To utilise ISAs and SIPPs effectively when investing in index funds, it’s essential to consider your investment horizon, risk tolerance, and overall financial goals.

Both accounts offer valuable tax advantages, allowing you to maximise your investment returns over the long term.

Why Invest in Index Funds?

Investing in index funds offers numerous compelling benefits that make them an attractive choice for both seasoned and novice investors.

First and foremost, index funds provide broad market exposure, allowing investors to diversify their portfolios across various companies, industries, or asset classes with a single investment.

Their passive management approach ensures lower fees compared to actively managed funds, potentially leading to higher long-term returns.

As index funds aim to track specific market indices, they eliminate the need for extensive research and stock picking, making investing more straightforward and less time-consuming.

Additionally, historical data consistently shows that many actively managed funds struggle to outperform their respective benchmarks, making index funds a reliable option for consistent market returns.

Whether you’re a hands-on investor or seeking a long-term wealth-building strategy, index funds provide a simple, cost-effective, and time-tested way to participate in the financial markets.

Pros & Cons of Index Funds


  • Diversification: Index funds offer instant diversification across a wide range of assets or companies, reducing individual investment risk.
  • Low Fees: With their passive management approach, index funds typically have lower expense ratios compared to actively managed funds, allowing investors to keep more of their returns.
  • Consistent Returns: Index funds aim to replicate the performance of the market or a specific index, providing investors with steady and predictable returns over the long term.
  • Simplicity: Index funds are easy to understand and invest in, making them ideal for beginners or investors who prefer a hands-off approach.
  • Tax Efficiency: Due to minimal trading within the fund, index funds tend to be more tax-efficient, leading to potential tax savings for investors.


  • Limited Upside Potential: While index funds provide consistent returns, they also limit the potential for substantial outperformance compared to actively managed funds, which can take advantage of market opportunities.
  • Market Risk: As index funds track the market, they are still subject to market volatility and downturns, which can result in temporary losses.
  • No Outperformance Guarantee: Index funds aim to match the performance of the underlying index, but they do not guarantee outperformance compared to the market or other investment strategies.
  • Lack of Customisation: Investors cannot customise the holdings of index funds, as they are predetermined by the index they track, limiting flexibility in tailoring investments to individual preferences.

Final Thoughts

Investing in index funds is a powerful and accessible strategy for UK investors seeking to build long-term wealth.

With their low fees, broad market exposure, and consistent returns, index funds offer a simple and effective way to participate in the financial markets.

By understanding your investment goals, risk tolerance, and conducting thorough research, you can make informed choices and embark on a journey toward financial success with index funds.


Are index funds safe?

Index funds are generally considered a safer investment compared to individual stocks due to their inherent diversification, as they track a broad market index like the S&P 500. However, like all investments, they carry some risk and can be affected by overall market fluctuations. Investors need to assess their risk tolerance and investment timeline when considering index funds.

Are index funds good for those new to investing?

Yes, index funds are often recommended for those new to investing due to their simplicity, low costs, and diversified nature, which can reduce overall investment risk. They provide exposure to a wide range of assets and sectors, making them a good starting point for beginners looking to build a balanced portfolio. However, it’s important for new investors to still conduct research and consider their long-term investment goals.

What is the easiest way to invest in index funds UK?

The easiest way to invest in index funds in the UK is through an online brokerage or a fund supermarket that offers a range of index funds. After opening and funding an account, you can select and invest in index funds that align with your financial goals, such as those tracking the FTSE 100 or S&P 500. These platforms often provide user-friendly interfaces and resources to assist beginners in making informed investment choices.

Are index funds better than stocks?

Index funds and individual stocks serve different investment strategies and risk profiles. Index funds offer diversified exposure to a broad market segment, reducing individual stock risk and often providing more stable, long-term returns. In contrast, individual stocks can offer higher potential returns but come with greater risk and require more active management and market knowledge.

Are index funds tax-free in the UK?

In the UK, index funds are not inherently tax-free. However, when held within a tax-efficient wrapper like an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP), gains and income from index funds can be shielded from taxes. Outside these wrappers, profits and dividends from index funds are subject to capital gains tax and income tax, respectively.

What are ethical stock market indexes?

Ethical stock market indexes are benchmarks that focus on including companies with positive environmental, social, and governance (ESG) practices. These indexes allow investors to align their investments with their values and support sustainable and responsible businesses. By investing in these indexes, individuals can potentially make a positive impact while seeking financial returns.

What is the best index fund in the UK?

Identifying the “best” index fund in the UK depends on individual investment goals and risk tolerance. Popular choices often include funds that track major indices like the FTSE 100 or S&P 500, such as the Vanguard FTSE 100 Index Unit Trust or the iShares Core S&P 500 UCITS ETF. Investors need to consider factors such as past performance, expense ratios, and fund size when selecting an index fund.

How much should you invest in an index fund?

The amount to invest in an index fund varies based on individual financial circumstances, goals, and risk tolerance. Start with an amount you feel comfortable committing, and consider regular contributions to benefit from compounding. Aim to maintain a diversified portfolio across various assets to manage risk.

Is the S&P 500 index fund a good investment?

The S&P 500 index fund is generally considered a good investment for those seeking long-term growth, as it offers diversified exposure to large-cap U.S. companies and has historically provided strong returns. However, like any investment, it carries risks, including market volatility, and its performance depends on the overall health of the U.S. economy. Investors should consider their investment goals and risk tolerance before investing in an S&P 500 index fund.

Do UK index funds pay dividends?

Yes, UK index funds may pay dividends. Many index funds include companies that distribute dividends to their shareholders. When investing in an index fund that tracks a dividend-paying index, investors may receive a portion of the dividends based on their holdings in the fund. However, not all UK index funds focus on dividend-paying companies, so it’s essential to check the fund’s specific investment strategy and holdings to determine if it pays dividends.

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Will Fenton is the founder of Sterling Savvy. He is a personal finance expert and writes about trading, investing, budgeting, and other financial topics.

Along with his education in Economics & Finance, he has experience working in the financial services industry in London working for one of the UK’s leading financial companies, “a trustworthy and respected provider of news, education and market analysis for the everyday investor”.

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