Market efficiency is important because it affects how investors make investment decisions.
If a market is highly efficient, asset prices already reflect available information. In such a market, it becomes difficult for investors to find undervalued or overvalued securities. This reduces the chances of earning extra returns through analysis alone.
That is why many investors prefer a passive investment strategy in efficient markets. Passive investing means buying and holding a broad market portfolio instead of trying to beat the market.
Example:
Suppose an investor spends ₹20,000 on research and advisory services to select stocks. After one year, the selected stocks generate a return of 11%. During the same period, a market index fund gives a return of 10.5%.
At first, the active strategy looks better. But after deducting research cost, transaction cost, and management fees, the actual return may fall below the index fund return.
This shows why passive investing can be preferred when markets are efficient.