New Delhi, July 30 -- Passive investing sounds straightforward: buy an index fund or an exchange-traded fund (ETF) and earn returns that mirror the market.

In reality, passive schemes do not always replicate their benchmark's performance exactly. This structural divergence is where tracking error comes into play.

To understand tracking error, it is important to distinguish it from tracking difference.

"Simply put, tracking error is the difference between scheme performance & its benchmark," explained Amol Joshi, founder of PlanRupee Investment Services.

Tracking difference measures the gap between a fund's return and that of its benchmark over a specific period, typically a year or longer. Tracking error, on the other hand, measures t...