Lesson 41 of 50 for advisers · Index funds: tracking error and difference · 4 min read · Reviewed 13 Nov 2026
Tracking error is how much an index fund’s daily returns wobble around the index: the annualised standard deviation of the daily gap, disclosed daily and capped at 2% for equity passive funds. Tracking difference is the actual return given up versus the index, disclosed monthly for 1, 3, 5 and 10 years. Clients feel the difference; the error shows consistency.
Tracking error is the annualised standard deviation of the daily gap between the index and the fund’s NAV. It is disclosed daily and capped at 2% for equity index funds and ETFs.
Tracking difference is the return actually given up against the index. It is disclosed monthly for 1, 3, 5 and 10 years and since launch.
Index funds and ETFs are capped at a 0.90% base expense ratio, but brokerage, transaction costs and taxes come on top.
ETFs trade on the exchange. Investors may deal directly with the fund house only above ₹25 crore, or below that when the ETF trades more than 1% under NAV for 7 days in a row.
Key idea: A low expense ratio with a high tracking difference costs the client more than it looks.
Try the short quiz on this page to check what stuck.
Continuously, with a lag of no more than 15 seconds.
Within 7 calendar days.
The one-year average must not exceed 1.25%.
For learning only, not investment advice. Built in India by a team that tracks its own money on Reva.