What tracking error captures
For a passive fund, the goal is not to beat the market but to mirror it. Tracking error quantifies how well it does that: it is the standard deviation of the gap between the fund's periodic returns and its benchmark's returns, annualised. A fund that perfectly replicated NIFTY 50 TRI every period would have a tracking error near zero; real funds drift due to expense ratio, cash holdings, dividend timing, and rebalancing friction.
How to read it
- Lower is better for an index fund or ETF. It signals faithful replication.
- A persistently high tracking error in a passive fund is a red flag, the product is not doing its one job well.
- Tracking error is not a measure of how good the index is, only of how tightly the fund hugs it.
How FindMF computes it
FindMF aligns the scheme's month-end returns with the benchmark's returns by month, then takes the standard deviation of the monthly differences and annualises by multiplying by the square root of 12. We require at least 24 overlapping months of AMFI NAV history; below that, the metric is suppressed rather than estimated on thin data. We earn no commission. See methodology for the full computation and benchmark sourcing.