A financial index generates a numerical score by considering various factors, including the prices of different assets. It serves as a standardized method to monitor the performance of a collection of assets. Typically, indexes gauge how well a group of securities replicates a specific section of the market.

These indices can take various forms, such as broad-based ones that encompass the entire market, like the Standard & Poor’s 500 Index or the Dow Jones Industrial Average (DJIA). They can also be more specialized, focusing on specific industries or segments, like the Russell 2000 Index, which concentrates on small-cap stocks.

Features of an Index

  • An index gauges the price performance of a group of stocks or securities.
  • It serves as a benchmark for monitoring specific securities and comparing their returns with those of mutual funds or portfolio managers.
  • Index ETF funds invest in a list of securities tied to the index they track, like the Nippon India ETF Nifty BeES ETF, which follows the Nifty stocks.
  • Indices can be broad, covering the entire market, or sector-specific, focusing on particular industries. They can also be based on market capitalization, such as the Nifty Small Cap 100 or Nifty Mid Cap 100.

What do you mean by Index Fund?

  • Index funds achieve this by constructing their portfolios to mirror the composition of the chosen index.
  • Index investing is considered a passive strategy, as it doesn’t involve individual stock selection or active management.
  • Research suggests that over extended periods, indexing strategies tend to outperform strategies that involve picking individual stocks.
  • Passive index funds also tend to be associated with reduced tax exposure.