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

Sayan Banerjee

doi:doi:10.11648/j.ajtab.20150101.16

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

Sayan Banerjee

Published in American Journal of Theoretical and Applied Business (Volume 1, Issue 1)

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.

Published in	American Journal of Theoretical and Applied Business (Volume 1, Issue 1)
DOI	10.11648/j.ajtab.20150101.16
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), 2015. 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.

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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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ACS 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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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://article.sciencepublishinggroup.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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TY  - JOUR
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
SP  - 37
EP  - 40
PB  - Science Publishing Group
SN  - 2469-7842
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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Author Information

Sayan Banerjee

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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ACS 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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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

Copy | Download

@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://article.sciencepublishinggroup.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}
}

Copy | Download

TY  - JOUR
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
SP  - 37
EP  - 40
PB  - Science Publishing Group
SN  - 2469-7842
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  -

Copy | Download