Explained: What SEBI’s new passive mutual fund guidelines mean for investors looking for easier tax saving

Capital markets regulator SEBI recently opened up another investment avenue for investors after it allowed mutual fund houses to launch passively managed open-ended equity-linked savings schemes (ELSS). Here’s what this means for investors looking for easier tax saving

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While SEBI has allowed Asset Management Companies (AMCs) to launch passive funds, the fund houses can only have either an actively-run ELSS scheme or a passive one

Capital markets regulator SEBI recently opened up another investment avenue for investors after it allowed mutual fund houses to launch passively managed open-ended equity-linked savings schemes (ELSS). SEBI, in its guidelines, also mandated that these passive ELSS schemes should be based on one of the indices comprising equity shares from top 250 companies in terms of market capitalization. According to passive fund experts, many investors recently have been disappointed with their active funds not outperforming the index, especially in the large cap universe. For such investors, ELSS Index Funds might be a preferable choice, especially considering relatively lower costs and simplicity.

Major Bummer: Either an actively-run ELSS scheme or a Passive one

While SEBI has allowed Asset Management Companies (AMCs) to launch passive funds, the fund houses can only have either an actively-run ELSS scheme or a passive one. At the moment, since most fund houses already have an active ELSS plan, they would have to wind down that scheme in order to launch a passive fund which may take years. So, experts believe that while AMCs with active ELSS offerings may not want to switch, the newer AMCs with no products in this category can jump at the opportunity to launch passive funds.

“AMCs who already have an existing active ELSS Fund would not prefer to change in my view; new AMCs who are starting their product range would surely find it beneficial. ELSS Funds with their tax benefit and long term approach offer investors a tax efficient investment tool for wealth accumulation towards meeting their financial goals. Being available in a passively managed Index Fund format at relatively lower cost can be an added benefit to help achieve the goals. Hence in my view, we will surely see a few new AMCs launching ELSS Index Funds soon,” said Anil Ghelani, CFA, Head of Passive Investments & Products, DSP Investment Managers.

Prableen Bajpai, founder, FinFix shares the same belief as she said, “Ideally, AMCs should be given the option to offer both, active as well as passive ELSS to investors. Going forward, as passives gain popularity, we may see this happen. Until then, I don’t see AMCs dropping active ELSS products to offer the passive counterparts. The newer AMCs which are yet to launch tax savers may consider passive ELSS products.”

Why Passive over Active ELSS for investors?

Experts have stated that recently many investors have complained about how their active funds have not delivered alpha. “Having the ELSS as an Index Fund would provide the other benefits such as transparency, diversification, relatively lower costs and most important – simplicity. This is what could drive the growth and attractiveness prompting more people to invest in ELSS going forward,” said Ghelani.

ELSS have a lock-in period of 3 years within which existing investors do not have an option to switch. “Hence, we would typically not see any switches from Active ELSS to ELSS Index Funds. But yes, for new investments, we could surely see some interest. This will be driven by two main reasons: Performance and Cost,” he added.

Prableen Bajpai, founder, FinFix stated, “Passive equity funds bring a lot of merit. Since ELSS are active, there is a huge divergence between returns offered and hence investors often go hunting for the best ELSS each year. Passive ELSS will overcome the fund selection risk and bring more permanency to the process of investing. I feel that passives should form the core of a portfolio, and for many ELSS can be that product. An SIP of Rs 12,500 for 30 years, assuming 12% returns, can create a corpus of Rs 4.3 crores for investors.”

According to Sebi’s recent guidelines for passive ELSS funds, the underlying index being tracked by the fund should comprise the top 250 stocks by market capitalization. This provides an option to invest in a fairly wide basket of stocks across large-caps and mid-caps which may be another positive for the interest investors.

Not Active OR Passive but Active AND Passive

According to Niranjan Awasthi, Head – Product, Marketing & Digital business at Edelweiss Asset Management Limited, “the ideal strategy for an ELSS investor would be to not pick active ELSS over passive or vice versa but to have both in the portfolio so as to reap the benefits of both as several active funds continue to outperform and generate alpha returns, while Passive ELSS funds also make sense, as a tax-saving alternative when clubbed with an opportunity for beginner investors to dive into mutual fund investments via the low-cost passive route”.

(Disclaimer – Niranjan Avasthi is the Head – Product, Marketing & Digital business at Edelweiss Asset Management Limited (EAML) and the views expressed above are his own. The views expressed in the article are experts’ own. FinancialExpress.com does not bear any responsibility for their investment advice. Please consult your financial advisor before investing.)

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