What is the index fund in India and how do you assess the index fund tracking error?

Index fund in India is a passive mutual fund that aims to achieve capital appreciation by imitating or replicating an underlying index. The objective of an index fund or an index ETF is to passively replicate the index in terms of its portfolio composition. A fund manager of an index fund has to keep track of any changes in the weightage or list of stocks. He/she does not have a say in the portfolio composition and has to imitate the performance of the index. Index funds are suitable to those who do not require extensive tracking and anticipate performance that is in line with the market returns can look at an Index Fund. rnThe majority of the index funds returns equal to or slightly lesser than the benchmark index. Index Funds tracking error is a measure of how much the fund performance has deviated from the benchmark index. rnIndex mutual funds disclose their tracking error in the factsheet. The fund manager has to create a portfolio that mirrors the index performance as closely as possible. Tracking error occurs in both scenarios; i.e. outperforming the index and underperforming the index. rnWhen selecting a mutual fund, you need to evaluate the index fund tracking error by looking at the following: 1. How much is the annualized index fund tracking error? 2. How much is the degree of variance in the index fund tracking error? 3. What is the index fund portfolio turnover ratio?rnInvestors prefer index fundsto avoid the fund manager’s involvement and the higher expense ratio in the case of an active mutual fund. However, investors of the Index Fund should keep in mind that portfolio concentration is high as compared to an actively managed mutual fund, which has a mandate to not exceed the cap of 10% allocation in a stock. As of May 24, 2021, the top three Sensex stocks had a total weightage of 31.57 percent. An actively managed fund, on the other hand, won’t have such a portfolio concentration risk. rnDisclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.rnMutual Fund investments are subject to market risks, read all scheme related documents carefully.