Last Updated on August 22, 2022 at 11:12 pm
We shall look at the tracking error of Nifty Next 50 index funds from our tracking error report sheet to find out funds that have lowest tracking error. You can download this sheet to appreciate deviations from the benchmark in an intuitive way.
In our previous study on how a market crash affects index funds, we had established the difficulties of measuring tracking error as a standard deviation and also how bad the tracking error can be if we use ETF price data (the only quantity that matters to retail investors) instead of ETF NAV data (widely used).
We shall look at the monthly deviations of six Nifty Next 50 index funds over the last two and three years. The primary quantity measure is the monthly return of Nifty Next 50 TRI minus monthly return of the Nifty Next 50 index fund.
This return difference should typically be positive because the fund return will be lower than the index return due to expenses. If this return difference is negative, it is a red flag. This means the fund manager has difficulty tracking the index over a month.
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We shall look for funda with a low return difference spread. That is we find the max return difference and min return difference and take the difference. This is the return spread. Data for the last two years is shown below.
| Fund | Return difference spread (last 2Y) |
| L&T Nifty Next 50 Index Fund(G)-Direct Plan | 0.51% |
| UTI Nifty Next 50 Index Fund(G)-Direct Plan | 0.52% |
| ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan | 0.74% |
| DSP NIFTY Next 50 Index Fund(G)-Direct Plan | 1.39% |
| IDBI Nifty Junior Index Fund(G)-Direct Plan | 1.57% |
| Motilal Oswal Nifty Next 50 Index Fund(G)-Direct Plan | 1.88% |
These funds have a spread of less than 1% over the last two years and the last three years also (see sheet below for full data for 34 funds).
- L&T Nifty Next 50 Index Fund(G)-Direct Plan
- UTI Nifty Next 50 Index Fund(G)-Direct Plan
- ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan
The next parameter is the no of negative return difference instances.
| Fund | Total no of return differences | no of neg return differences |
| ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan | 469 | 64 |
| IDBI Nifty Junior Index Fund(G)-Direct Plan | 469 | 92 |
| L&T Nifty Next 50 Index Fund(G)-Direct Plan | 117 | 24 |
| DSP NIFTY Next 50 Index Fund(G)-Direct Plan | 395 | 83 |
| UTI Nifty Next 50 Index Fund(G)-Direct Plan | 469 | 142 |
| Motilal Oswal Nifty Next 50 Index Fund(G)-Direct Plan | 192 | 79 |
Among funds with 400-plus return difference history (last two years) the ICICI and IDBI funds have performed well. UTI has a higher no of return differences but this is not something investors need to lose sleepover. If anything it only shows a low expense error does not mean a low tracking error. The DSP fund has also done well.
Download the freefincal index fund and ETF tracking error data sheet – Nov 2020 (link to excel file, will open on all spreadsheet apps)
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