What is meant by index investing and its advantages?

Popular index of Indian stock market are sensex, bank nifty, nifty and more. By index investing it is meant that maintaining same combination of stocks in same ratio as they are present in the targeted index so that it replicates the index itself.While trading in market financial advisory services can be used to get better trade results. There are thousands of companies which are listed on exchange and it is a tedious job to select good performing stocks among all. Even experienced traders face difficulty in selecting good stocks and a lot of time has to be devoted in market to carefully study individual stock and its performance. Index investing provide an opportunity to maintain a well diversified portfolio and earn profitable returns as this is a humble approach of trading and holdings only gets affected when a company enter/exit index.

Following are some advantages of index investing:

1. Index investing can be done with less capital because it is not actively managed i.e no frequent buying and selling is involved here. Index funds simply replicate the performance of index therefore investors just need to ensure that they are maintaining same number of stocks and their ratio as index and no other prediction is required. With this type of investment you need to pay less brokerage costs as you are not frequently buying/selling stocks.
2. In order to get listed on a particular index a company has to fulfill various criteria stated by SEBI. While investing in any index you need not to worry about quality of stock as every stock has satisfied guidelines to get listed on index.
3. There is no need to keep a track record of market updates continuously and devote more time in market.Tracking movements of index is quite easy and also it is not required to worry about entry/exit time. Investors who are not having much can choose this investment style and earn well from market.

Index investing also has few disadvantages like :

1. Not every stock is listed on index. It may be possible some stock is performing really well and because of some reason it is not listed on any index. In such condition investors misses the opportunity of investing in it.
2. In index some large cap companies may dominate. It is possible that a group of 4-5 companies combined weight is more than 40-50% of the index. If these 4-5 companies do not perform well then you have to suffer huge loss because of it.

As every investment style has its advantages and disadvantages, indexing investing also has. Financial advisors can be consulted to get recommendation on trading tips, mcx tips for improving returns from market.If you are a less experienced trader or do not have time to study market behavior then this style is best for investing your hard earned money as it will assure approximately same returns of an index.

I am a financial analyst. I always like to read and explore more about market.