However, a study reveals that three index funds, ICICI Prudential Index fund, Franklin India Index fund and UTI Nifty Fund (Growth), have actually outperformed benchmark index, S&P CNX Nifty. A report collated by Religare Finvest shows that the S&P CNX Nifty of the National Stock Exchange (NSE) during the last three years has generated compounded returns of 39.53%.
As against this, ICICI Prudential index fund, Franklin India Index fund and UTI Nifty Fund (Growth) has given compounded returns as high as 42.51%, 41.72% and 40.78% respectively during the last three years.
Fund managers attribute this out performance to two aspects. One is a high tracking error and the other is a low expense ratio.
Tracking error indicates how closely the fund is following the index. A high tracking error means that the fund is deviating from following the exact index weightage or is investing in other assets outside the index.
Traditionally, index funds have a low expense ratio as a passive investment style is followed and does not involve large expenses.
These funds in the reckoning have also been effective in lowering the expense ratio, believe industry experts.