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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Scheme Related Information

An investor wants to invest in a scheme that tracks the Nifty 50 index. Which statement about such an index fund is most accurate?

In an index fund tracking the Nifty 50, returns differ slightly from the index because of expenses, cash holdings and transaction costs. This deviation is called tracking error. The fund is passively managed and holds index stocks in index weights.

  1. AThe fund manager actively selects stocks to beat the index
  2. BTracking error arises because returns of the fund differ from the index returnsCorrect
  3. CThe fund has no expenses, so its returns exactly match the index
  4. DThe scheme must invest only in the top 10 index stocks

Explanation

Index funds are passively managed and replicate the index, but expenses, cash holdings and transaction costs cause the fund's returns to deviate from the index. This deviation is called tracking error. Expenses do exist, so the claim of exact matching is wrong, and the fund holds all index constituents in index weights.

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