American Journal of Theoretical and Applied Business

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Measurement of Tracking Error Based on Category Index - The Hidden Cost of Index Funds

Received: 30 June 2015    Accepted: 19 July 2015    Published: 20 July 2015
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Abstract

Purpose of the study: The paper aims at finding how effectively the index funds in India are being able to observe the strategy ‘indexing’, setting tracking error as the critical factor. Background of the study: The belief that financial markets are efficient and it is therefore impossible to consistently beat the aggregate market has led to the emergence of passive portfolio management and index funds. Less efforts have been directed towards measuring the effectiveness of index funds, as regards indexing strategy. This paper is written to fulfill this gap. Methodology: Broad category index has been used to measure the tracking error depicted by the index funds. Various formulae have been used to gauge the measure of tracking error. Results: Tracking error exhibited by the index funds are significantly higher than the level of tracking error, accepted globally. Findings: It is found that buffer cash for redemption pressure and higher management fees of the index funds in India, are the major factors contributing to higher level of tracking error.

DOI 10.11648/j.ajtab.20150101.16
Published in American Journal of Theoretical and Applied Business (Volume 1, Issue 1, June 2015)
Page(s) 37-40
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Tracking Error, Index Funds, Category Index, Passive Investment, India

References
[1] Donald E. Fischer, Ronald J. Jordan, Security Analysis and Portfolio Management, Prentice Hall, 1991, ISBN: 0137991495, 9780137991495, Edition:5
[2] “AMFI Workbook”-Association of Mutual Funds In India.
[3] “Occasional papers on Tracking Error”- India Index Services & Products Ltd.,nse-india.com
[4] Fernandes, Kshama. (2003). Evaluating Index Fund Implementation in India, Working paper, http://www.nse-india.com/content/research/Paper66.pdf.
[5] Giuliano, De Rossi. (2012). Measuring the tracking error of exchange traded funds: an unobserved components approach, UBS Investment Research.
[6] Saldanha, Richard. (2013). Understanding Tracking Error-Papers of Investec Asset Management.
[7] Narend, S. (2014). Performance of ETFs and Index Funds: a comparative analysis, Working papers of NSE India Limited.
[8] Vohra, Shikha and Inder, Shivani. (2012). Mutual Fund Performance: An Analysis of Index Funds, International Journal of Research In Commerce & Management, 3(9).
[9] Factsheets: morningstar.in.
[10] Pandian,Punithavathy,Security Analysis and Portfolio Management, Vikas Publishing House PvtLtd, 2009,ISBN:8125910840,9788125910848.
Author Information
  • Guest Lecturer, MBA Department, Goenka College of Commerce & Business Administration, Kolkata, West Bengal, India

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  • APA Style

    Sayan Banerjee. (2015). Measurement of Tracking Error Based on Category Index - The Hidden Cost of Index Funds. American Journal of Theoretical and Applied Business, 1(1), 37-40. https://doi.org/10.11648/j.ajtab.20150101.16

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    Sayan Banerjee. Measurement of Tracking Error Based on Category Index - The Hidden Cost of Index Funds. Am. J. Theor. Appl. Bus. 2015, 1(1), 37-40. doi: 10.11648/j.ajtab.20150101.16

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    AMA Style

    Sayan Banerjee. Measurement of Tracking Error Based on Category Index - The Hidden Cost of Index Funds. Am J Theor Appl Bus. 2015;1(1):37-40. doi: 10.11648/j.ajtab.20150101.16

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  • @article{10.11648/j.ajtab.20150101.16,
      author = {Sayan Banerjee},
      title = {Measurement of Tracking Error Based on Category Index - The Hidden Cost of Index Funds},
      journal = {American Journal of Theoretical and Applied Business},
      volume = {1},
      number = {1},
      pages = {37-40},
      doi = {10.11648/j.ajtab.20150101.16},
      url = {https://doi.org/10.11648/j.ajtab.20150101.16},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.ajtab.20150101.16},
      abstract = {Purpose of the study: The paper aims at finding how effectively the index funds in India are being able to observe the strategy ‘indexing’, setting tracking error as the critical factor. Background of the study: The belief that financial markets are efficient and it is therefore impossible to consistently beat the aggregate market has led to the emergence of passive portfolio management and index funds. Less efforts have been directed towards measuring the effectiveness of index funds, as regards indexing strategy. This paper is written to fulfill this gap. Methodology: Broad category index has been used to measure the tracking error depicted by the index funds. Various formulae have been used to gauge the measure of tracking error. Results: Tracking error exhibited by the index funds are significantly higher than the level of tracking error, accepted globally. Findings: It is found that buffer cash for redemption pressure and higher management fees of the index funds in India, are the major factors contributing to higher level of tracking error.},
     year = {2015}
    }
    

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    T1  - Measurement of Tracking Error Based on Category Index - The Hidden Cost of Index Funds
    AU  - Sayan Banerjee
    Y1  - 2015/07/20
    PY  - 2015
    N1  - https://doi.org/10.11648/j.ajtab.20150101.16
    DO  - 10.11648/j.ajtab.20150101.16
    T2  - American Journal of Theoretical and Applied Business
    JF  - American Journal of Theoretical and Applied Business
    JO  - American Journal of Theoretical and Applied Business
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    EP  - 40
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    UR  - https://doi.org/10.11648/j.ajtab.20150101.16
    AB  - Purpose of the study: The paper aims at finding how effectively the index funds in India are being able to observe the strategy ‘indexing’, setting tracking error as the critical factor. Background of the study: The belief that financial markets are efficient and it is therefore impossible to consistently beat the aggregate market has led to the emergence of passive portfolio management and index funds. Less efforts have been directed towards measuring the effectiveness of index funds, as regards indexing strategy. This paper is written to fulfill this gap. Methodology: Broad category index has been used to measure the tracking error depicted by the index funds. Various formulae have been used to gauge the measure of tracking error. Results: Tracking error exhibited by the index funds are significantly higher than the level of tracking error, accepted globally. Findings: It is found that buffer cash for redemption pressure and higher management fees of the index funds in India, are the major factors contributing to higher level of tracking error.
    VL  - 1
    IS  - 1
    ER  - 

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