Error | SBI Mutual Fund (2024)

FAQs

How much tracking error is acceptable? ›

What is a Good Number? A “good” tracking error depends upon investor preference. If the investor believes markets are efficient and that it is difficult for active managers to consistently add value, then that investor would prefer a lower tracking error.

Tracking error is simply the difference between the scheme's return and that of the benchmark. This measures how closely a mutual fund scheme replicates the returns of the identified benchmark. Larger the deviation from its benchmark returns, higher the tracking error a scheme is said to have.

The most common types of risks associated with investing in mutual funds are market risk, credit risk, liquidity risk, interest rate risk, and inflation risk; as a result, your mutual fund performance may suffer. You can manage your portfolio and avoid a slump by having a basic understanding of these risks.

A small tracking error indicates that the passive fund will tend to follow its benchmark very closely throughout, whereas a large tracking error indicates the opposite. A useful analogy to understand these concepts is that of race between two cars, where one car is the index and the other is the fund.

0,5% MPE – theory and practice

MPE (Max Permissible Error) indicates the maximum permissible error for a calibration. A 1/3 MPE indicates that the uncertainty level of a laboratory must be lower/better than 1/3 of the MPE.

High expense ratios are just one of the red flags Benz points out. Other fees can eat into performance as well, including sales charges that some companies tack on when you buy or sell a fund. High manager turnover is another cause for concern.

Will mutual funds go up in 2023? ›

Most mutual fund managers and advisors have been warning that the stock market may offer muted returns in 2023. Sure, like most forecasts this may also prove wrong. However, the consensus is that you should be happy with single-digit returns from your equity mutual funds in 2023.

Consistent Underperformance

If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations.

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

Are mutual funds safer than ETFs? In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds, and corporate bonds come with somewhat more risk than U.S. government bonds.

Homestead Small-Company Stock (symbol HSCSX), a member of the Kiplinger 25, was the most consistent fund on our list. It outpaced its benchmark in 69% of the rolling 12-month periods, compared with just 54% for the average small-company fund.

Interpreting the Tracking Error

A fund manager is said to perform well if they are able to replicate the return earned on the target index. The larger the difference between the index fund return and the target index return, the higher the tracking error. A large tracking error may be indicative of poor performance.

Any fund which shows a low tracking error signifies that its portfolio is following its benchmark quite closely. Contrarily, a high tracking error signifies that a fund is not following the set benchmark.

The lower the tracking error, the more closely the ETF matches the benchmark. Under normal circ*mstances, such tracking errors are not expected to exceed 2% per annum. However, this may vary due to the reasons mentioned above or any other reasons that may arise and particularly when the markets are very volatile.

Therefore, tracking error indicates how well the index fund tracks the benchmark index during the investment tenure. A low tracking error signifies that the portfolio closely follows its benchmark index. At the same time, a high tracking error signifies that the portfolio is not following the benchmark.