What Is Index – Its Meaning And Importance In Investing

Key Takeaways

• Indexes serve as a benchmark for evaluating your investment’s performance against. This helps you understand the performance of your portfolio.
   
• There are various types of indexes available, such as broad market index, thematic index, and many more. Each type gives a different perspective and helps focus on your investing strategy. 
   
• Index plays an important role in financial markets, such as risk assessment, sector identification, and many more. You can use it to compare your investments to a standard and adjust your strategy accordingly.

An index is a measure that tracks the performance of a specific group of securities, such as shares, bonds, or other market instruments. Indexes give investors a single number to understand how that group is performing without looking at each company individually.

You can think of an index like a scorecard for a market or sector. When the companies in the index grow in value, the index moves up. When they fall, the index moves down. This provides a quick and trustworthy approach to assess how the market is performing.

Suppose you invest ₹4,80,000 equally across 48 separate firms. 
 

This means that the combined value of your investments grew by ₹48,000 in a year, or 10%. Also, the index representing those companies would reflect this 10% growth.

In this blog, we will learn more about the index and its importance in investing.  

Main Types Of Indexes In Investing

Different types of indexes are built for different purposes. This depends on whether they aim to track the entire market, a specific sector, or a theme. 

The following table highlights the main types of indexes in investing:
 

The above-mentioned different indexes allow you to focus on the market as a whole or zoom in on specific areas. This makes it easier for you to track and plan your investments effectively.

Importance Of Index In Investing

Indexes are not just for showing numbers to you. They actively influence how you, as an investor, plan and manage your money. They help you in measuring performance, understanding market direction, and making informed investment choices.

The following table highlights the important role the index plays in investing:
 

The above-mentioned table highlights that indexes are more than just market indicators. They are valuable tools that guide you in making better and more confident decisions.

Bonus Tip: Tracking error can occur when an index changes its list of companies. The portfolio manager needs to trade shares to match the adjustments. These trades can create hidden costs that may slightly reduce your overall returns.

Final Thoughts

Stock market indexes are practical benchmarks for evaluating overall market movements and sector trends. If you as an investor track indexes such as the Sensex and Nifty 50, then you can compare your portfolio returns with the broader market and spot areas of strength or weakness.

If you regularly follow index shifts, then it also gives insights into market direction, sector rotation, and investor sentiment, allowing for more data-driven investment decisions.

FAQs

1. What does a 100 index mean in the stock market?

The 100 index represents an index that tracks the 100 largest listed companies. 

2. What is the difference between index and stock?

An index tracks the performance of a group of stocks, while a stock represents ownership in a single company.

3. What are the top 5 index funds?

In August 2025, top 5 index based on returns are: Motilal Oswal Nasdaq 100 FOF Scheme, Edelweiss US Technology Equity FoF, Motilal Oswal Nifty Midcap 150 Index Fund Direct, Motilal Oswal Nifty Midcap 150 Index Fund Direct, and DSP Nifty Next 50 Index Fund.

4. How many types of indexes are there in India?

India has three major types of stock market indexes: benchmark, sectoral, and market capitalisation indexes. 

5. What are the 4 types of index numbers?

Four common types of index numbers are price index numbers, quantity index numbers, value index numbers, and special purpose index numbers.

6. What is the IPO index?

The IPO index measures the performance of newly listed companies after they debut on the stock exchange.

7. How much money do you need to buy index funds?

You can start investing in index funds in India with as little as ₹500 through SIPs or around ₹1,000 as a lump sum.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?