Glossary· Benchmark-relative
What is Tracking error?
How far the fund's returns typically stray from the benchmark's, annualized.
For an index fund or ETF, low is the whole job — it is the cleanest measure of tracking quality. For an active fund it just measures how active the manager is, which is neither good nor bad on its own.
For the formula and the constants behind this figure, see Methodology.
Guides that use Tracking error
7 guides put this term to work.
- Active vs passive: can a human beat the market?The accounting identity that starts the argument, what SPIVA India shows about large caps, why persistence is the real problem — and where active still earns its fee.
- Index funds and ETFs: low-cost passive investing explainedWhat the Indian evidence says about active large-cap funds, the difference between tracking error and tracking difference, and where indexing stops winning automatically.
- Treynor and information ratio: advanced tools for comparing fundsOne prices market risk, the other prices the decision to differ from the index. For choosing between active funds in one category, the information ratio is the most relevant number on the page.
- Tracking error and standard deviation in passive fundsOne measures how much a fund moves, the other how much it moves differently from its index — and neither is the number that actually reaches your returns.
- Factor investing and smart beta: beyond market-cap weightingA disclosed, rules-based tilt at a fraction of active cost — and active risk by another name, with long stretches of underperformance that are the reason the premium exists.
- Contra funds: betting against the crowd, and what being early costsOverreaction is a real and repeatable market failure. The price of exploiting it is years of looking wrong in public, which is why so few investors collect.
- ESG funds: investing with a conscience, or paying for a label?India's rules are stricter than most — six declared strategies and a 65% assured-BRSR-Core requirement. What that does and does not settle about greenwashing.
More on benchmark-relative
How the fund behaved against its index. All computed from 36 monthly returns, so a fund needs about three years of history to show any of them.
- Alpha
- Annualized return above what the fund's market exposure alone would predict.
- Beta
- How hard the fund moves when the index moves. 1 = in step.
- R²
- How much of the fund's movement the benchmark explains, 0–100%.
- Treynor ratio
- Excess return per unit of beta rather than per unit of total volatility.
- Information ratio
- Return above the benchmark, per unit of tracking error.
- Upside capture
- The share of the index's gains the fund captured in months the index rose. 100 = matched it.
- Downside capture
- The share of the index's losses the fund took in months the index fell. Lower is better.