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

Published: June 7, 2020 at 11:02 am

Last Updated on August 22, 2022

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

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    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 Name1 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.

    Scheme Name1-year tracking error
    ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan0.82
    IDBI Nifty Junior Index Fund(G)-Direct Plan0.33
    DSP NIFTY Next 50 Index Fund(G)-Direct Plan1.00
    UTI Nifty Next 50 Index Fund(G)-Direct Plan0.05

    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 Name1 Month3 Months6 Months9 Months
    ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan0.0260.4370.5280.704
    IDBI Nifty Junior Index Fund(G)-Direct Plan0.213-0.0130.0860.298
    DSP NIFTY Next 50 Index Fund(G)-Direct Plan0.1200.7020.6910.726
    UTI Nifty Next 50 Index Fund(G)-Direct Plan-0.0620.0160.0520.071

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

    Scheme NameICICI Pru Nifty Next 50 Index Fund(G)-Direct PlanIDBI Nifty Junior Index Fund(G)-Direct Plan
    2 Years0.700.26
    3 Years0.750.67
    4 Years0.950.80
    5 Years0.870.87
    6 Years1.141.32
    7 Years1.802.16

    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?

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