returns<\/a> between a portfolio (index fund) and a benchmark (target index) against which its performance is evaluated. In other words, it is the difference between the returns on an index fund and the returns on a target index.<\/p>\n\n\n\n\n\n\n\nAn index fund is a mutual fund that invests in securities that form part of a target \u201cbasket of investments\u201d called the target index. The index fund manager aims at investing in the target securities in proportions and weights that are similar to those in the target index. The objective is to earn a return that is commensurate to that of the target index. In other words, the index fund tries to mimic the performance of a target index. The investor attempts to replicate the financial performance of the target index by holding all the securities in the index.<\/p>\n\n\n\n
Tracking Error = Portfolio return – Target index return<\/em><\/p>\n\n\n\nExample:<\/p>\n\n\n\n
Suppose a given portfolio offers a 7% return while the benchmark offers a 10% return. The tracking error is – 3% (7% – 10%).<\/p>\n\n\n\n
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