There are 2 specific reasons why the returns between the index funds would diverge-

Expense ratio- If two index funds are tracking the Nifty, both are bound to generate similar returns. The only difference will be the expense ratio. The fund, which has a lower expense ratio will generate comparatively higher returns on investment.

Tracking error- The fund manager would not be able to invest the entire corpus exactly in the same proportion as in the underlying index due to certain factors such as the fees and expenses of the Scheme, corporate actions, cash balance, changes to the underlying index and regulatory restrictions, which may result in Tracking Error with the underlying index.

The Scheme’s returns may therefore deviate from those of the underlying index. Tracking Error” is defined as the standard deviation of the difference between daily returns of the underlying index and the NAV of the Scheme. The fund manager would monitor the Tracking Error of the Scheme on an ongoing basis and would seek to minimize the Tracking Error to the maximum extent possible.

simran Kauranswered.Expense ratio-If two index funds are tracking the Nifty, both are bound to generate similar returns. The only difference will be the expense ratio. The fund, which has a lower expense ratio will generate comparatively higher returns on investment.Tracking error-The fund manager would not be able to invest the entire corpus exactly in the same proportion as in the underlying index due to certain factors such as the fees and expenses of the Scheme, corporate actions, cash balance, changes to the underlying index and regulatory restrictions, which may result in Tracking Error with the underlying index.