Need of an Index
1. Benchmarking: Indices are measuring tools that help investors check the performance of their portfolio against a benchmark, which is usually an index. This measure also helps in terms of the success of investment strategies and portfolio adjustment strategies.
2. Market Representation: An index is a summary of the state of an industry and an immediate reflection of the size of the market. It reflects something that can be understood as the direction and nature of the market and is used as a means of measuring how investors feel about the market.
3. Passive Investing: Indices perform the function of passive investing through their medium; index funds and exchange-traded funds (ETFs) are passive trading instruments. These investment instruments are designed to mirror an index. Therefore, indices provide investors with ready access to a diversified portfolio at a very low cost.