Index funds are merely supposed to mimic the returns provided by the underlying benchmark index such as the Sensex or the Nifty. Essentially, these funds are expected to follow the passive investing route, buying and holding stocks in the index in the same proportion as the index. However, many mutual fund (MF) houses offer slightly tweaked variants of index funds, by including an element of active management, promising to deliver better performance than the underlying benchmark and other index funds. But almost always, such funds become too clever by half in their futile attempts at beating the broader markets.

Such funds invariably have the term 'plus' or 'advantage' attached to their name, indicating that the fund manager intends to offer something extra-that is, returns superior to the underlying index. Sadly, the 'extra' bit ends with the name itself. Take for instance, JM Nifty Plus Fund which has made an ass of investors.

Launched in February 2009, this fund has yielded returns of 42% since inception, failing to catch hold of the phenomenal rally that ensued post March 2009. Its underlying index, S&P Nifty, has jumped 56% over the same period.

Since inception, ING Nifty Plus Fund has provided returns of 16%, while its underlying index, S&P Nifty, has managed to deliver 18% returns over the same period. The LIC MF Index Fund is also severely lagging behind its underlying index, the BSE Sensex. Since inception, the fund has provided returns of 16% while the BSE Sensex has yielded returns of 24%. The HDFC Index Fund- Sensex Plus Plan has so far managed to live up to its mandate. While its benchmark, the BSE Sensex, has provided 23% returns since its inception, the fund has managed to deliver 26%.

It is not just the adapted index funds that fall flat on their faces. Pure vanilla index funds also make a hash of passive investing. With unforgivably high tracking errors, these funds have failed to do justice to the concept of passive index investing. For instance, the LIC MF Index Fund-Nifty Plan and LIC MF Index Fund-Sensex Plan has tracking errors as high as 7% and 5%, respectively. The HDFC Index Funds linked to the Nifty and Sensex, too, run a high tracking error of 3%.

Index funds attempt to deliver outperformance by either tweaking the portfolio underlying the benchmark index or by altering the weightages assigned to each constituent of the index. Fund managers also try their hands at timing the market, much to their own peril. Such enhanced indexing and market timing defeats the very purpose of an index fund and leads to substantial underperformance relative to the benchmark. It thus translates into a huge tracking error, which is appalling for a fund that is only tasked with following the broader index.