An index is a group of securities chosen to track a particular investment theme market, industry or sector etc. The primary goal of index is to ascertain the risk or return profile of that theme without necessarily holding every security even if that may qualify. Index calculation is basically being representation value to track the investment theme value. Market sectors are huge having enormous hundreds and thousands of securities, therefore its becomes too time-consuming and expensive that is reason for Index development.
The exact compilation of securities in an index is known as basket, while the proportion of the index each particular security is called as its weighing. An index’s value is a single number that, when compared to its starting value, depicts how the index has performed over time. Having a basket of securities available, Index maintenance service allows investment managers to define the eligibility criteria of the products and effectively use security composition and weights resulting from the index/investment portfolio rebalancing. When set up correctly, investment require little maintenance.
An index is comprised of only those securities in the basket that are most relevant to the investment theme which helps market participants to follow market trends without having to track the other enormous amount of available securities.
Benefits to market participants utilizing Index Calculation:
- Market Performance: Index calculation help an investor assess a given market performance of the investment easily. It can let investor objectively measure market performance by helping ascertain risk /return profile.
- To gauge how effectively current active strategy is working. It lets investment manager performance of the securities compilation in the basket.
- Index calculation of index value also serves as the foundation for other investment products like mutual funds or other like Exchange Traded Funds(ETF)
- Index calculation of Index value evaluates a market risk profile or its diversification benefit. It helps evaluate various kinds of securities present in the basket it risk /return on the investment.
This index calculation of index value is very important in monitor the changes in prices of it constituents over time and we can clearly compare our returns on the investment.