What is tracking error? Why does it occur?
The extent to which the index fund does not track the index properly is known as tracking error. It is
the difference between a fund’s portfolio returns and the benchmark it was designed to track during the investment period. Low tracking error means a portfolio is closely following its benchmark.
Reasons for occurrence of tracking error:
- Index is a dynamic combination and the constituents change. Till the time the fund manager also adjusts the fund holdings accordingly, there will be tracking error present in the fund.
- Expense ratio of the fund also drags down the overall performance. A fund with a low expense ratio may have a higher tracking error because it doesn’t closely track the underlying index or redemption pressure.
What is an Index Fund?
An index fund is a type of mutual fund which constructs its portfolio by tracking the composition of a standard market index such as the Nifty 50 or the Sensex. The fund, not only invests in stocks which constitute the benchmark index, but also in ...
Are all index funds the same?
All index funds are not same because different index funds track different indices. But the philosophy behind investing remains the same. There are different types of indices in India: Benchmark indices like BSE Sensex and NSE Nifty Sectoral indices ...
What is a benchmark?
A benchmark is a standard against which the performance of a stock or mutual fund can be measured. The fund houses select benchmark indices on the basis of market capitalisation and sectoral or thematic strategies of the respective funds. Hence, ...
Who should invest in index funds?
Index funds are suited for passive investors, i.e. investors who are looking to build long-term wealth but: Don’t have time to manage their portfolio Want to stay away from constant monitoring and juggling their mutual fund portfolio. Are skeptical ...
Why are index funds popular in other parts of the world?
Index funds are considered as ideal for constructing a core portfolio for long term wealth creation due to their diversification benefits, low cost and low portfolio churn. Globally, Index funds are popular due to the following reasons – Easy - Index ...