Over last couple of years the chatter around passive funds have grown and so have the AUM. I also jumped in this bandwagon with investment in Nifty 500 and Sensex 30 fund. The reason was their simplicity.
But this article by Finshots team looks into tracking error of passive funds and how closing price affects it. Apparently, it’s not that simple.
Passive funds base their trades on the closing price of stocks. And since closing prices are determined using VWAP, it can sometimes deviate the fund’s performance from the main index. And the result of this is something called a tracking error or a small difference between the fund’s returns and the index’s performance.