There are currently 32 index funds with at least one-year history as on Jan 28th 2021. If we compare their one-year trailing returns with the respective benchmark (total return indices), six index funds are outperforming! That is, their one-year return is higher than than the one-year index return!
Why does this happen? Although the stocks in an equity index fund are well known and there is no research involved in the selection, adjusting the index fund portfolio weights to closely match that of the index is not an easy job.
Even if we considered a closed-ended index fund where there no daily investments and redemptions, tracking the index is a hard enough job, everyday prices moves would need to be accounted for. There are corporate actions like dividends, and expenses will have to be deducted daily.
In an open-ended index fund, daily AUM movement in and out of the fund adds a tracking complexity layer. Such funds will always hold a small amount of cash to handle these transactions.
There will always be some difference in returns between the index fund and its index. Ideally, we expect the index fund return to be lower than that of the index because of expenses and the cash holding. Typically tracking errors from other sources will either enhance or reduce this return difference.
If the index fund return is greater than the index return, then the tracking error is so high that it has eliminated the effect of expenses and the cash holding. This typically happens if the portfolio is too volatile (e.g. higher turbulence, mid cap or small cap segments) and/or the AUM is too low (a single large investment or redemption can result in a significant tracking error).
The last year (29th Jan 2020 to 28th Jan 2021) a period when we woke up to the coronavirus news and how it gradually crippled our economy and subsequent stock market recovery was a turbulent period. This is a stringent tracking test of index fund managers.
When there is increased market turbulence, it would be hard for the fund manager to buy or sell large quantities of stocks due to higher impact costs (a natural gap between bid and sell price). See Warning! Even “large cap” stocks are not liquid enough! Can you handle this?
The last 1Y return difference = Index fund return minus index return is shown below. The first six index funds have positive return differences. Some extreme underperformance is also seen at the bottom of the table. Low AUM and the impact cost associated with stocks beyond the top 50 in terms of market cap is likely to be the reason for this as well. Readers may compare the funds in “red” with our previous list published almost two years ago: These five index funds beat their indices! Why you should avoid them!
List of Index Fund One-year return differences
| Scheme Name | Difference |
| Taurus Nifty Index Fund(G)-Direct Plan | 0.9887 |
| Motilal Oswal Nifty Midcap 150 Index Fund(G)-Direct Plan | 0.5903 |
| Motilal Oswal Nifty 50 Index Fund(G)-Direct Plan | 0.4057 |
| Franklin India Index Fund-NSE Nifty(G)-Direct Plan | 0.3458 |
| IDFC Nifty Fund(G)-Direct Plan | 0.2805 |
| ICICI Pru Sensex Index Fund(G)-Direct Plan | 0.2714 |
| Motilal Oswal Nifty Smallcap 250 Index Fund(G)-Direct Plan | -0.0553 |
| Nippon India Index Fund – Sensex Plan(G)-Direct Plan | -0.1850 |
| Tata Index Fund-Sensex Plan(G)-Direct Plan | -0.2918 |
| Axis Nifty 100 Index Fund(G)-Direct Plan | -0.3286 |
| Motilal Oswal Nifty Bank Index Fund(G)-Direct Plan | -0.3309 |
| ICICI Pru Nifty Index Fund(G)-Direct Plan | -0.5095 |
| UTI Nifty Next 50 Index Fund(G)-Direct Plan | -0.5097 |
| IDBI Nifty Index Fund(G)-Direct Plan | -0.5344 |
| LIC MF Index Fund-Sensex Plan(G)-Direct Plan | -0.5576 |
| UTI Nifty Index Fund(D)-Direct Plan | -0.5752 |
| Motilal Oswal Nifty 500 Fund(G)-Direct Plan | -0.5819 |
| Tata Index Fund-Nifty Plan(G)-Direct Plan | -0.6290 |
| HDFC Index Fund-Sensex(G)-Direct Plan | -0.6371 |
| Nippon India Index Fund – Nifty Plan(G)-Direct Plan | -0.6682 |
| Aditya Birla SL Index Fund(G)-Direct Plan | -0.7106 |
| HDFC Index Fund-NIFTY 50 Plan(G)-Direct Plan | -0.7965 |
| DSP NIFTY 50 Index Fund(G)-Direct Plan | -0.8666 |
| LIC MF Index Fund-Nifty Plan(G)-Direct Plan | -0.9038 |
| SBI Nifty Index Fund(G)-Direct Plan | -1.0791 |
| ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan | -1.1352 |
| DSP Equal Nifty 50 Fund(G)-Direct Plan | -1.3228 |
| DSP NIFTY Next 50 Index Fund(G)-Direct Plan | -1.4033 |
| Motilal Oswal Nifty Next 50 Index Fund(G)-Direct Plan | -1.4524 |
| IDBI Nifty Junior Index Fund(G)-Direct Plan | -1.4834 |
| Sundaram Smart NIFTY 100 Eq Weight Fund(G)-Direct Plan | -2.8004 |
| Principal Nifty 100 Equal Weight Fund(G)-Direct Plan | -3.1605 |
How to select index funds
Not all index funds are the same. Investors should keep in mind fund size (AUIM) expense ratios and actual return differences. Interested readers can refer to our guides on index fund selection:
- Nifty Next 50 Index Funds with lowest tracking error
- Three Nifty index funds with lowest tracking error
🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- 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.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr 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 nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or 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 for 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 3000 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 what 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 you 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!
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 for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new 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 from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published 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
This 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
This is an in-depth dive analysis 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)