Financial Risk Management
Evaluating the Tracking Performance of Index Mutual Funds and Exchange Traded Funds in India

Article Details
Pub. Date : Mar, 2019
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM41903
Author Name : Pinkesh Dhabolkar and Y V Reddy
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 13

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Abstract

Though a difference exists in the way Exchange Traded Funds (ETFs) and index mutual funds are formed, both the funds follow the passive style of investing, wherein the fund manager tries to mimic the returns of the chosen market index. Using a sample of 16 index mutual funds and 14 ETFs, from inception of the funds to March 31, 2017, this paper investigates the ability of the index mutual funds and ETFs in India to track their chosen market index. The study reveals that index mutual funds exhibit significantly higher tracking error than its counterpart. The results of regression analysis further reveal that ETF fund managers have been able to construct a portfolio that is more commensurate with the chosen index than its counterpart.


Description

The announcement by the labor ministry that Employees’ Provident Fund Organization would invest 5% of its corpus in Exchange Traded Funds (ETFs) has put index funds in the limelight and has also intrigued the market regulators, investors and researchers. The origin of index fund, as a tool of investment vehicle, can be traced back to the 1970s. Indexing is a passive investment strategy, which has gained immense momentum in both Indian and overseas markets. Index funds are funds which comprise a portfolio which constitutes a market index in the same proportion, with the intent to mimic performance of the market index. Popularity of index funds has substantially increased mostly due to major studies based on performance of actively managed mutual funds, which conclude that except for a few from the actively managed mutual funds, the remaining persistently underperform market index due to efficient capital market as well as higher expense ratio that diminishes its returns (Elton et al., 1995; Carhart, 1997; Goel et al., 2012; and Muruganandan, 2013).


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