# Tracking Error and Information Ratio

How far a fund strays from its benchmark, and whether the strays pay off.

Source data: AMFI daily NAV (17,900+ schemes) + Nifty benchmark indices. Last updated: 2026-07-02. Interactive tool: https://mfpro.tigzig.com

## What is Tracking Error?



Tracking Error (TE) measures how much a fund's daily returns deviate from its
 benchmark's daily returns. Low TE means the fund closely follows the index. High TE
 means the fund's returns are quite different from the benchmark on a day-to-day basis.

 


## How We Compute TE


 
 excess_return = fund_daily_return − benchmark_daily_return

Daily TE = StdDev(excess_return) [sample std dev]

Annualized TE = Daily TE × √252
 

We annualize by multiplying by √252 (not 252), because standard deviation scales with
 the square root of time.

 


## What is Information Ratio?



Information Ratio (IR) = excess return / tracking error. It tells you how much active
 return you get per unit of active risk. Higher is better. It's essentially the Sharpe
 Ratio but against the benchmark instead of the risk-free rate.

 


## How We Compute IR


 
 IR = (Mean daily excess × 252) / (Daily TE × √252)
 

Numerator annualizes the mean daily excess return. Denominator is the annualized TE.

 


## Worked Example



Active fund vs index fund


Active fund: TE = 5.8%, IR = 0.45


Index fund: TE = 0.3%, IR = −0.10


The active fund deviates significantly from the benchmark (5.8% TE) but generates
 positive excess return per unit of deviation (IR 0.45). The index fund barely deviates
 but slightly underperforms due to tracking costs.

 
 


## How to Interpret





- TE 6%: Highly active, concentrated bets

- IR > 0.5: Very good active management

- IR 0-0.5: Positive but modest active return

- IR < 0: Active bets are hurting - worse than just buying the index

## Related metrics

More Risk Metrics methodology from the MFPRO analytics tool:

- [Beta and R-Squared](/mfpro/beta-and-r-squared)

- [Alpha and t-statistic](/mfpro/alpha-and-t-stat)

- [Sharpe Ratio](/mfpro/sharpe-ratio)

- [Sortino Ratio](/mfpro/sortino-ratio)

- [Capture Ratios (Upside and Downside)](/mfpro/capture-ratio)

- [Win Rate](/mfpro/win-rate)

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Source: https://www.tigzig.com/mfpro/tracking-error-information-ratio