Which Nifty, Nifty Next 50, Sensex index funds have lowest tracking error?

Published: October 9, 2019 at 10:19 am

Last Updated on August 22, 2022 at 11:15 pm

Let us find out which index funds tracking the Nifty, Sensex or Nifty Next 50 have the lowest tracking error using a simple and easy to understand method. If there is enough interest, I shall publish this report from time to time. We shall restrict the discussion to index funds for now.

ETF tracking error also is essential, but it will have to be done with respect to its price and not NAV (as is usually reported). Actual investor returns are based on ETF price and not NAV, and therefore, all calculations should be done with the price. Here is an example: ICICI Nifty Next 50 Index Fund vs Reliance ETF Junior BeEs. A more dramatic illustration of the price effect is seen here: ETFs vs Index Funds: Stop assuming lower expenses equals higher returns!

I realised historical ETF price data is available at Moneycontrol only just before completing this article. Therefore I have not included ETFs here but shall do so in another post shortly. Also, I have only included Nifty, Sensex and Nifty Next 50 index funds for this study. The rest have too short a history to warrant consideration.

The job of an index fund manager is to track a given index. This may seem easy at first, as there is no active stock selection involved. However, the fund will be subjected to in and outflows and therefore, must have a small amount of cash.  Corporate actions like splits and dividends will have to be accounted for. Considering all this, making sure the portfolio weights of individual stocks match closely to that of the index is not as easy as it seems.  Then there are expenses to worry about. You can consult this excellent introduction to tracking error by the NSE.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Thus the NAV movement of an index fund will always trail behind the price of the underlying index. A good fund manager will minimise this lag. A measure of this lag is known as tracking error.

Tracking error is defined as the standard deviation of the daily difference between the fund return and index return: lower this value, the better. Very few people bother to understand that the tracking error depends on the duration of the calculation. A one-year tracking error can be quite different from a three-year tracking error.

Therefore, a more straightforward and more comfortable to understand check of index fund performance is necessary. I prefer to compare 1,2,3,4 and 5 years (or longer) returns of the index funds with the returns of the total returns index. A fund with a consistently low return difference has small tracking error.

Nifty Index Funds with lowest tracking error

Let us start with the trailing returns of Nifty index funds.

NIfty Index fund trailing returnsNow we calculate the difference between scheme return minus index return. This must be negative. If this is positive for any duration, immediately reject the fund! See, for example, these five index funds beat their indices! Why you should avoid them!

Nifty index funds return difference tableThe funds highlighted in green above have a return difference lower than the median return difference. This means that they are in the top half of the pile.  Investors can choose a fund with sizeable AUM among these and low expense ratio.

Since the expense ratio keeps fluctuating, one cannot infer past tracking performance based on the current expenses. Also shown above is only the trailing return data. Rolling returns can provide a better picture. I shall include this next time.

To reiterate, we have defined tracking error as consistently low return difference between the fund and index over the last 1,2,3,4 and 5 years. This is easier for investors to calculate on their own, is more comprehensive (as opposed to computing last 3Y daily returns based tracking error) and most importantly, natural to understand.

Nifty Next 50 Index funds with lowest tracking error

List of Nifty Next 50 Index Funds with lowest rturn differenceICICI Nifty Next 50 fund has a good track record. The UTI fund has impressed over the last year. As an investor, you can undoubtedly go for it. As an analyst, more time is necessary to judge it.

Sensex Index Funds with lowest tracking error


Here the HDFC fund had an active management past. HDFC Sensex plus fund was merged with HDFC Sensex fund. So its history cannot be considered. The Tata fund has impressed in this window but has too low an AUM (~ 11 Crores)


Return comparison of the index fund with index (total returns) is a simple and easy way to measure tracking performance. This can be immediately done at most fund portals. Notice that the return difference will be more than the expense ratio of the fund. This is because expenses are only one factor that contributes to tracking error.

An efficient fund manager of a slightly expensive index fund can still “outperform”  a less expensive index fund! Bottom line, index funds require “active” management too! If there is enough interest in such a study, I shall repeat it for ETFs also.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)