SEBI: Tracking Error of Equity ETFs and Index Funds Cannot Exceed 2%
Moneylife Digital Team 24 May 2022
The tracking error for equity exchange traded funds (ETFs)/index funds cannot exceed 2% and the tracking difference for debt funds—averaged over one year—must be within 1.25%, as per the recent circular of the Securities and Exchange Board of India (SEBI) on passive mutual fund (MF) schemes.
 
The circular is titled ‘Development of Passive Funds’ and considered the recommendations of the mutual funds advisory committee (MFAC) on the back of growing interest for passive investment products that are characterised by transparency, diversification and lower cost compared to active MF schemes.
 
The tracking error is the annualised 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 must be within 2% levels. This metric measures how well the fund generates returns vis-a-vis 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 rolling data, on a daily basis, on the website of respective asset management companies (AMCs) and Association of Mutual Funds of India (AMFI), according to the SEBI circular.
 
Note that for schemes in existence for a period of less than one year, the annualised standard deviation shall be calculated based on available data.
 
In addition to the tracking error, passive MF schemes  must also disclose ‘tracking difference’ on a monthly basis. The difference between the index product’s return from that of its benchmark index as on a particular date is called tracking difference.
 
Tracking difference has to be disclosed for tenures of 1-year, 3-years, 5-years and 10-years and since the date of allotment of units.
 
Tracking difference is capped for debt ETFs/index funds to 1.25%. “For Debt ETFs/ Index Funds the annualized tracking difference averaged over one-year period shall not exceed 1.25%," stated the SEBI circular.
 
Comments
SEBI Issues Norms for Debt Index Funds, ETFs; Permits Mutual Funds To Roll Out Passive ELSS Schemes
Moneylife Digital Team 24 May 2022
Market regulator Securities and Exchange Board of India (SEBI) on Monday announced changes to guidelines  for passive mutual fund (MF) schemes, aiming to boost exchange-traded funds (ETFs).
 
Further, the market regulator...
Enforcement Directorate Digs up Assets of Karvy Stock Broking that SEBI Failed To Discover since 2019
Sucheta Dalal, 21 May 2022
On 8 March 2022, the enforcement directorate (ED) at Hyderabad issued a provisional attachment order under the Prevention of Money Laundering Act (PMLA) against C Parthasarathy, founder of the Karvy group of entities, his sons...
98 BSE Brokers and 82 NSE Brokers Surrender Membership in Past 2 Years as Smaller Brokers Struggle with Increased Compliance Rules
Yogesh Sapkale, 21 May 2022
The past two years after global lock-downs were triggered by the COVID-19 pandemic, India's investor population has almost doubled due to the rush of new investors. Strangely, however, the brokerage business is seeing a huge churn...
Rampaging Majority Promoter and Raging Minority Shareholders!
Ranganathan V, 21 May 2022
On 6 May 2022, Elcid Investments Ltd, listed on the Bombay Stock Exchange (BSE), a name unknown to many until then, with an issued share capital of 2,00,000 equity shares of Rs10 each, with the promoters holding 1,49,950 shares,...
Free Helpline
Legal Credit
Feedback