Index investing is a preferred method of top investors for making more money from what they have to start with.
It is simple passive investment method of investing to replicate the performance of a specific index – generally equity, by purchasing the component securities of the index. This way, your investments will closely track the index.
Passive investment means buy-and-hold strategy and that too for a long period, and this means a lower fees for managing it as compared to an active portfolio. It is easy to deal with index investing as it does not require that much financial knowledge to create your own portfolio. An index is a pack of companies that can’ be easily replicated. This makes it easy for you to enter this investment world.
Therefore it can be said that index investing is a good option to opt for if you are seeking to have higher returns on limited investment. One can follow the below-given steps to use index investing to invest in the stock market:
Step1: Choose the right index
The first and foremost step to enter the investment world is to choose the right index as per your preference. You have several options to choose from. Sensex and Nifty are the two most important stock market Indices in India. They are the benchmark indices, which means that these are the important ones, and a standard point of reference for the entire stock market of India. The various options that you can go for include: S&P BSE Sensex, S&P BSE 100, NIFTY 100, NIFTY 50, NIFTY Midcap 100, NIFTY Bank, NIFTY Next 50
Both the exchanges in India, NSE and BSE also have some indicators that are a gauge of companies falling under one particular sector. Indices like NSE Pharma and S&P BSE Healthcare are indicators of their respective exchanges for the pharmaceutical sector.Basically, the stock market includes 11 sectors including IT, healthcare, industrial, and many more. So you can choose any sector you think is suitable for investment. Accompanied with some sound financial knowledge, you can beat the market easily by such investing. It is just that you have to be clear about your expectations regarding the outperformance of a particular region, sector, or factors like:
Step 2: Choose a fund
Once you have chosen an index as per your preference then the next step is to opt for a fund that replicates that index. However, you have to be careful in this as there will be a lot of Index funds providers available that will have similar offerings with slight differences including expense ratio, dividend yield, etc. You have to go through some research before choosing a relative index fund.
Some of the questions that can help you get the right fund for tracking your chosen index are:
• Which index fund closely tracks the performance of your chosen index?
• Which index fund costs you the lowest?
• What are restrictions on the index that may prevent you from investing and how can you deal with them?
Once you have got satisfactory answers to all your questions then you may find the right one easily.
Step 3: Buy shares
Finally, you can buy shares directly from the companies in your opted index and for that, you have to open an account through a broker. Again you have to do your part of homework here carefully. This is because different brokers bring you different pros and cons; you have to compare them and finalize the one that you think may benefit you the most.
Pros of stock market investment:
Benefits of a growing market –
The moment the economy grows, it leads to an increase in jobs, that ultimately createhigher income and more sales.
Stay ahead even in inflation –
Stocks can give an average annualized return of 10%. It is much better than the average annualized inflation rate.
Easy to buy –
You can invest in the stock market atease, in the comfort of your home,either online, or through a broker / financial planner.
Cons of stock market investment:
High risk –
There are chances of losing all your investment in a one-shot if the company you have invested in does not perform well.
If you are buying stocks on your own without knowing the company’s future plans, you may lose your investment and expected profit, as even the best company’s price will fall in a market crash.
When you invest directly in a company, you may face competition with institutional investors as they have access to financialmodels, and sophisticated trading tools.
Things To Consider when investing in the stock market:
Before investing you must consider capitalization, as it is better to own stock in different-sized companies because they act differently in each stage of the business cycle.
Research properly about a company you are investing in. See the future plans of the company as that may give you an idea of the upcoming rise and fall in the price of a share.
One of the main benefits of investing in different asset categories is the choice to diversify your risk. If one of your investments does not work well you may go with other.
Consider the company not just share price:
If you are investing in a share, it is imperative to consider the company instead of the share price. If the goals of the company are higher they may be your best investment ever.
Invest your surplus money and not your emergency funds:
It is wise to keep aside funds for emergencies and unforeseen expenses, apart from your stock investments. This will help you stay invested and exit by timing the market, to give you the maximum returns.
Index investing, a passive form of investment is one of the easiest and best ways to get higher returns. If you follow the steps wisely and carefully, along with some research, using index investing, you can do wonders in your investment.
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