ELSS passive funds allowed to be launched – Here’s how they differ from existing tax saving MFs

Passive ELSS funds will be Index ELSS funds and will offer investors an option to save tax with the benefits of an index fund.

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Equity linked saving schemes are essentially tax saving mutual funds with a lock-in period of three years.

The Securities and Exchange Board of India has allowed mutual fund houses to launch passive equity linked saving schemes (ELSS). Under the passive mode, the ELSS will be benchmarked to a specific index without the role of a fund manager. Sebi’s ‘Categorization and Rationalization of Mutual Fund Schemes’ has been partially modified and fund houses have been given the option to either offer a ‘Passive ELSS’ or an ‘Active ELSS’ to investors under the open-ended fund category.

“The advent of passively managed equity-linked savings schemes (ELSS) provides a cost and tax-saving alternative to individual investors. The category had nearly Rs 1.5 lakh crore assets as of April 2022. How fund houses take to this will have to be seen since the regulator has asked them to choose between active and passive variants, and most (36 out of 41 fund houses) already have an active plan in their offerings,” says Piyush Gupta, Director – Funds Research, CRISIL.

Presently, all ELSS funds are managed by a fund manager and follow an active fund management approach. Being a passive ELSS fund, the allocation in them has to be based on one of the indices comprising equity shares from top 250 companies in terms of market capitalization. This means, the Passive ELSS funds may be benchmarked to Nifty 50, Nifty Next 50, Nifty100, Nifty 200 or any other index.

ELSS are essentially tax saving mutual funds with a lock-in period of three years. Investment made in ELSS helps one save tax under Section 80C of the Income Tax Act. After the lock-in ends, the investment in ELSS can be rolled on without exiting if the market conditions are not conducive.

Essentially, Passive ELSS funds will be ‘Index ELSS’ funds and will offer investors an option to save tax with the benefits of an index fund. One of the several advantages of index funds is the low cost.

Currently, most ELSS funds have exposure to large-cap-, mid-cap and even small cap stocks and the selection of stocks and industries are largely dependent on the fund manager. In passive funds, the exposure will only be in the top 250 companies based on market -cap and allocation will be in line with the index constituents.

As almost all fund houses already have Active ELSS funds available in their bouquet of funds, it remains to be seen which passive funds will see the light of the day. In the interest of investors, SEBI may allow fund houses to offer both of these to investors at a later date.

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