Tracking error of equity ETFs/index funds not to exceed 2%: SEBI

The Tracking difference has to be disclosed for tenures 1 year, 3 year, 5 year, 10 year and since the date of allotment of units in mutual funds

The circular is titled – ‘Development of Passive Funds’ and has considered the recommendations from the Mutual Funds Advisory Committee (MFAC) .

The lack of growing interest for passive investment products that are characterized by transparency, diversification. And lower cost compared to active funds.


The SEBI circular 

The tracking error is the annualized standard deviation of the difference in daily returns. Between the underlying equity index and the NAV of the ETF/ Index Fund based on past one-year rolling data. And the circular stars say it should  be within 2% levels.

This metric measures how well the fund generates returns compared to  the target index’s returns.

As per the circular, all ETFs/ Index Funds (including debt ETFs/ Index Funds), must disclose the tracking error based on the past one-year available data,  on the website of respective AMFI and AMC’s, according to the SEBI circular.

Precautionary measures to be taken   for funds in existence for a period of less than one year, the annualized standard deviation shall be calculated based on available data only.

In addition to the tracking error, passive funds have to disclose ‘tracking difference’ on a month timely basis.

 The Tracking difference has to be disclosed for tenures 1 year, 3 year, 5 year, 10 year and. Since the date of allotment of units in mutual funds.

Tracking difference is set  for debt ETFs/Index funds to 1.25 %. The SEBI circular states  “For Debt ETFs/ Index Funds the annualized tracking difference. Averaged over one-year period shall not exceed 1.25%,” .

Any  kind of deviation from these specified limits must be taken to the notice of trustees. Of the respective firms with corrective actions taken by the AMC, stated in the circular.

Whatever the scenario SEBI forms in such a meeting it won’t attract active investments. Because the if Mutual funds fail to deliver their shown promises on the website. Then the same cycle of lack of investment will go on.