Index funds best?

Q:

Are index funds the best mutual funds for beginners? — J.L., Albuquerque, N.M.

A:

Index funds are terrific not only for beginning investors, but also for seasoned ones. Investing without them can be a lot of work, requiring you to study lots of stocks, bonds or mutual funds, make many decisions and keep up with your holdings.

Meanwhile, a low-fee, broad-market index fund offers a quick and easy way to own an assortment of securities that track an index and earn roughly the index’s return. For example, an S&P 500 fund will allow you to instantly invest in 500 of America’s biggest companies and earn the return of the S&P 500 index (less fees). Many of the 500 companies have significant global operations as well, giving you international diversification.

There are broader index funds, too; some track the entire U.S. stock market or the world market, while other index funds might focus on bonds, small companies or particular regions. For whatever kinds of investments you seek, there’s often an index fund.

Q:

Is a return on equity above 100 percent good or bad for a company? — G.H., Santa Maria, Calif.

A:

It depends. Return on equity (ROE) reflects the productivity of a company’s net assets (assets minus liabilities). You calculate it by dividing net income by shareholder equity. Net income is found on a company’s income statement, while shareholder equity is found on the balance sheet. In general, the higher the ROE, the better.

However, some ROES can be artificially high if the company has taken on a lot of debt or has bought back a lot of shares. These actions shrink shareholder equity, driving up ROE.