Which Nifty Next 50 index fund has the lowest tracking error?

image of an athlete standing on a track representing tracking error of Nifty Next 50 funds

Published: June 7, 2020 at 11:02 am

Last Updated on

A look at the six available Nifty Next 50 (NN50) index funds to determine which has the lowest tracking error.

Only two NN50 index funds have a history greater than seven years – the ones from  ICICI and IDBI. The next oldest fund is from UTI and is yet to complete two years at the time of writing! DSP launched its NN50 fund only in Feb 2019. Motilal came up with its fund in Dec 2019 and  L&T launched its fund only in April 2020.

The oldest NN50 passive fund is Nippon India ETF Junior BeES which started in Feb 2003 (when NN50 was known as Nifty Jr). Visually, this is the only ETF that has minimal price-NAV fluctuations and a decent AUM of Rs. 1000 plus crores.

Computing ETF tracking error analysis requires price data and not NAV (as conveniently used by AMCs and rating portals). See: ICICI Nifty Next 50 Index Fund vs Reliance ETF Junior BeEs

Other ETFs have also been reviewed before: What is the best way to invest in Nifty Next 50 Index? For typical retail investors, an index fund is better than an ETF as the burden of selling it to fellow unitholders is removed.

Let us start with the last one year returns (wrt June 5th 2020)

Scheme Name 1 Year
NIFTY NEXT 50 – TRI -8.24
ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan -9.06
IDBI Nifty Junior Index Fund(G)-Direct Plan -8.58
DSP NIFTY Next 50 Index Fund(G)-Direct Plan -9.25
UTI Nifty Next 50 Index Fund(G)-Direct Plan -8.29

A simple way to measure index-tracking efficiently is to look at the return differences.

Tracking error = index (div incl) return minus index fund return

This must always be positive and as small as possible.

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!
Scheme Name 1-year tracking error
ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan 0.82
IDBI Nifty Junior Index Fund(G)-Direct Plan 0.33
DSP NIFTY Next 50 Index Fund(G)-Direct Plan 1.00
UTI Nifty Next 50 Index Fund(G)-Direct Plan 0.05

The clear loser is the DSP fund. It may be young but that is just too much difference. Sadly the ICICI fund is a close second for this duration. It would be premature to declare the UTI fund as the winner due to its age but that is good going!

The tracking error for durations below the last one year is tabulated below. Good going by UTI. Cannot say the same for funds from DSP and ICIC.

Scheme Name 1 Month 3 Months 6 Months 9 Months
ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan 0.026 0.437 0.528 0.704
IDBI Nifty Junior Index Fund(G)-Direct Plan 0.213 -0.013 0.086 0.298
DSP NIFTY Next 50 Index Fund(G)-Direct Plan 0.120 0.702 0.691 0.726
UTI Nifty Next 50 Index Fund(G)-Direct Plan -0.062 0.016 0.052 0.071

These are the tracking errors for the only two older funds.

Scheme Name ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan IDBI Nifty Junior Index Fund(G)-Direct Plan
2 Years 0.70 0.26
3 Years 0.75 0.67
4 Years 0.95 0.80
5 Years 0.87 0.87
6 Years 1.14 1.32
7 Years 1.80 2.16

Beyond two years, there is much of a difference between the funds. The NN50 fund from IDBI has performed reasonably over both short and long durations. ICICI’s fund has not done well over the last two years in tracking NN50. A closer watch by its investors is necessary.

It is quite possible that the scenario could be different if we consider rolling tracking errors. We shall do this in a future article.

It would be premature to declare the UTI fund as the winner as it is too young and its investors should not assume its tracking efficiency would remain the same with time.

AUM in and outflows and market volatility and impact costs play a big role in maintaining a low tracking error. See Warning! Even large cap stocks are not liquid enough! Can you handle this?

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 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 kind of paid articles, promotions or 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
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, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
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 low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, 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 199 (instant download)
Free android apps