By Gwendoline Tan
If you’ve only got a minute:
- Index investing lets you invest in a broad market index, rather than picking individual stocks.
- Benefits include low barriers to entry, minimal technical expertise, low fees, and diversification.
- It is a long-term approach to ride out market volatility and let your funds grow over time.
Investing doesn't have to be complicated, nor does it require constant vigilance to build wealth.
Index investing offers just that. This low-cost, diversified strategy that lets you invest in a broad market index and is an option whether you're new to investing or a seasoned hand.
Warren Buffett, chairman of Berkshire Hathaway and one of the world’s most successful investors, has long recommended this approach. Mr Buffett advocates that rather than trying to beat the market by selecting individual stocks, most people will achieve better long-term results by holding a diverse basket of low-cost index funds. With this approach, he feels that even the “know-nothing” investor can often outperform professionals over time. 1
What are index funds?
Understanding index investing begins with defining its building blocks. We'll explore what an index fund is, and how it directly relates to (and differs from) the market indices it tracks.
Market Index
A market index serves as a benchmark, representing a specific group of stocks or bonds within a specific market.
Well-known examples include the Straits Times Index (STI) in Singapore, the Hang Seng Index (HSI) in Hong Kong, and the Standard & Poor’s 500 (S&P 500) in the US. Each of these indices show how the largest and most influential companies in their respective markets are performing.
Index fund
As you cannot invest directly in a market index, you would do so through an index fund, which is specifically designed to replicate the performance of an index. These are predominantly exchange-traded funds (ETFs) or in some cases, unit trusts.
Index funds achieve this by investing in the same underlying assets, typically stocks or bonds, and in proportions that aim to mirror the index. For example, if a particular company has a 5% weight on the STI, an STI-tracking fund will allocate about 5% of its portfolio to that company.
Given the goal is to track rather than outperform, index funds are passively managed, often resulting in lower fees than actively managed funds. By investing in an index fund, you get broad market exposure and diversification across sectors and asset classes in a straightforward and cost-effective manner.
Benefits of index investing
Here are 3 advantages that index investing offers, making it attractive to beginners and seasoned investors alike.
1. Simple to start
One of the most appealing aspects of index investing is its straightforward nature. Unlike building your own portfolio which requires time and effort in researching companies, monitoring performance, and executing trades, index funds simplify this process. By tracking markets, they avoid the complexity of needing technical expertise or constant monitoring.
Furthermore, passive funds tend to offer more predictable long-term returns. While some active funds outperform their benchmarks, many fall short, especially after factoring in higher management fees and expenses.2 This makes it all the more important to research and pick the right strategies and portfolio managers when investing in active funds.
Read more: How to analyse a company’s financials
2. Low cost
Managing your own portfolio often means higher overall costs, especially if you’re buying and selling small amounts of individual stocks, as each trade usually incurs a buy or sell fee.
On the other hand, index funds come with minimal fees. Because of their passive strategy of tracking an index, the overheads from extensive research or active management like rebalancing or investment recommendations, are minimised.
Over time, these lower costs can boost your investment returns.
Moreover, getting started is easy with accessible options. Regular savings plans, like Invest-Saver, allow you to make recurring investments from as little as S$100 per month. Think of it as investing on repeat without having to lift your finger (much).
Read more: Costs and fees of investing in ETFs
Find out more about: DBS Invest-Saver
3. Diversification
Buying into an index fund instantly spreads your money across many companies and sectors, reducing the risk tied to any single stock.
For example, the STI consists of the top 30 companies listed on the SGX, so your risk is spread across all 30 instead of concentrated in just 1. In the case of the S&P 500, your investment is spread across 500 companies, further lowering individual company risk.
This diversification helps to reduce the likelihood of losing significant capital if a single company underperforms.
Read more: Investing with only ETFs and unit trusts
Risks of index investing
Like any investment strategy, index investing is not without risks. Here are 3 risks to keep in mind.
1. Market risk
Since index funds are designed to track the market, their performance more or less mirrors it.
Unlike actively managed funds, they don’t attempt to “beat” the market by avoiding poorly performing sectors. In times of economic uncertainty, geopolitical tension, or global financial stress, even a broad index fund can see declines.
In April 2025, the S&P 500 plunged nearly 6% in a single day as global markets reacted sharply to US tariff announcements.3 During such times, investors cannot avoid losses, since the funds move with the market.
While short-term downturns may be unavoidable, staying invested for the long-term and continuing to invest regularly can help smooth out volatility over time. In fact, significant market corrections like the one in April 2025 can often present strategic opportunities for long-term investors to increase their holdings in the same fund at reduced prices.
Read more: Discipline, time, and patience in investing
2. Concentration risk
Not all indices are equally diversified. Some may be heavily weighted toward specific sectors or companies.
For example, the STI is dominated by the 3 local banks (DBS, OCBC, and UOB) which together make up more than 40% of the index. Similarly, the top 10 holdings of the S&P 500, which include technology giants like Nvidia, Microsoft, Amazon and Apple account for a significant portion (almost 40%) of the index’s performance.
This creates both sector concentration and geographic concentration. If one sector underperforms, such as banking in Singapore or technology in the US, it can disproportionately affect the overall returns of the index and the index fund.
To mitigate this, consider spreading your investments across multiple indices or geographies so that your portfolio isn’t overly dependent on any single market or sector.
3. Tracking error
While the goal of an index fund is to mirror the performance of its benchmark, in practice, it is rarely a perfect match.
An index fund’s returns will almost never be identical to its benchmark and this deviation is known as a "tracking error." This could be due to fees and expenses that eat into overall returns, the fund’s method of replicating the index, and liquidity in the underlying securities, especially during market volatility.
However, for most long-term investors, the tracking error will be small.
Read more: Investing along the economic cycle
Getting started
Before you invest, make sure you are clear about your investment goals, time horizon and risk tolerance. You can start with small, regular, contributions through Invest-Saver, or invest a lump-sum in an index fund that aligns with your needs.
For lump-sum investments, you can utilise cash, and savings in your CPF Ordinary and Special Accounts, and/or your Supplementary Retirement Scheme (SRS) monies. Do note that investments made with CPF monies are restricted to a list of approved products. Examples of readily available index fund options include the ABF Singapore Bond Index Fund, Nikko AM Singapore STI ETF, and the SPDR Straits Times Index ETF, among others. 4
To help simplify your decision-making, DBS investment experts have curated an essential list of funds called CIO Insights Funds. This includes index funds as well as ready-made discretionary portfolio solutions like digiPortfolio to provide even broader diversification.
Let’s consider 2 ETF-based digiPortfolio options:
Asia Portfolio: Invests in ETFs across Singapore, India, China, and Asian Real Estate Investment Trusts (Reits). The medium-risk portfolio has around a 15% exposure to the STI through various ETFs including Nikko AM Singapore STI ETF and Lion-Phillip S-REIT ETF, tracking the STI and its Reits respectively.*
Global Portfolio: Offers exposure to global ETFs, including S&P 500, Europe, and Asia. The medium-risk portfolio offers about 25% exposure to the S&P 500 via the SPDR S&P 500 UCITS ETF.*
When choosing a fund, prioritise broad diversification by selecting those that track established indices, and pay attention to fees to keep costs low.
*Figures accurate as at 30th June 2025
Read more: Is lump-sum investing or DCA better for you?
Find out more about: Tracking the markets with CIO Insights Funds
In summary
Index investing isn’t about quick wins or trying to outsmart the market. Its strength lies in discipline, patience, and consistency. By staying invested through different market cycles, you give your money time to grow steadily.
While volatility is inevitable, history shows that those who stay the course are more likely to build lasting wealth.
