JMGT_V7_N3_RP1 Koti Reddy Tamma Journal on Management 2230 – 715X 7 3 12 25 Exchange Traded Funds, Index Mutual Funds, Hedge Funds, Market Indices, Tracking Error Analysis, Systematic Risk The paper examines mechanism of functioning of Exchange Traded Funds (ETFs) and its growth in India. It also includes identification of potential new ETFs which can be launched to cater the need of Indian investor to effectively diversify their portfolios at minimal cost. To analyze performance characteristics of ETFs and their comparison with Index Mutual Funds, a sample of 6 ETFs tracking different indices and 5 Index Mutual funds tracking the same S&P CNX Nifty Index, was studies based on past 3 years daily data. Performance characteristic like tracking error was calculated by three methods. Average per centage yearly return was also calculated. Findings and conclusions show that ETFs are better in tracking their respective benchmarks as compared to Index Mutual Funds. December 2012 - February 2013 Copyright © 2013 i-manager publications. All rights reserved. i-manager Publications http://www.imanagerpublications.com/Article.aspx?ArticleId=2112