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Risk measures
What is tracking error?
Tracking error measures how closely an index fund or ETF follows its index: the variability of the gap between the fund's returns and the index's. Lower is better.
How it works
Costs, cash held for redemptions and the timing of index changes all cause small gaps. Tracking difference is the related measure of the average gap over a period. SEBI requires index funds and ETFs to disclose both.
Example
Two Nifty 50 index funds both trail the index by about 0.3% a year, but one wobbles around that gap far more; it has the higher tracking error.
Keep in mind
- Compare index funds on the same index by tracking error, tracking difference and expense ratio.
- Tracking error does not apply to active funds in the same way.
Questions people ask
What is a good tracking error?
As low as possible; compare funds tracking the same index.
Tracking error or tracking difference?
Difference is the average gap; error is how much that gap varies.
Related terms
General information for education, not investment advice or a recommendation of any scheme. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not be sustained in future. Last reviewed 25 October 2026.