Index funds with the lowest tracking error

When the market is trading at an all-time high it becomes very risky to take the concentrated risk that is investing in some sectoral or thematic funds. Therefore, if you want to benefit from the equity investment, you can opt for index funds. These are more like well-diversified funds. According to data from the Association of Mutual Funds in India (AMFI), Asset under management (AUM) in index funds surged almost three times during in last year. AUM at the end of September 2021 stood at Rs 33824 crore against Rs 12581 crore the same month last year. Although most of the investment comes in schemes that replicate indices such as Nifty 50, S&P BSE Sensex, others are also gaining ground now. 

One of the fund houses, Navi AMC, recently launched the cheapest Nifty 50 index fund that has an expense ratio of 6 basis points. Besides expense ratio what is also important before selecting an index fund is tracking error. Tracking error is the difference in actual performance between the fund and its corresponding benchmark. So even if the index fund has a very low expense ratio, and has higher tracking error, it may not solve the purpose of investing in index funds. Hence, it is important to look at both expense ratio and tracking error before committing your fund to an index fund. 

Below table shows the index funds that track Nifty 50 and is sorted based on tracking error. 

The above table shows that though, Motilal Oswal Nifty 50 Index Fund has the lowest expense ratio, it has a higher tracking error. Hence, the best combination is the fund that has lower expenses as well as lower tracking error.