Soon, Mutual Fund houses having active equity-linked savings schemes (ELSS) will be able to offer passive ELSS. The Security and Exchange Board of India (SEBI) recently allowed mutual funds having existing active ELSS to launch passive ELSS schemes provided fresh flows to such existing active schemes are halted.
SEBI’s new directive was welcomed by market watchers as they saw it as a welcome break from the past where asset managers were allowed only to launch either active or passive ELSS schemes. While SEBI’s announcement sounds good for mutual funds, what is in it for investors? Let’s take a look:
1. Experts say that investors will now get more options for passively investing in ELSS funds to maximize their returns plus tax savings. Passive funds are cheaper than active funds.
“Passive ELSS are way cheaper, with a lower expense ratio as compared to the active ones. It gives investors a tax advantage, and the lower expense ratio is something wherein investors will get directly benefited, and they will be able to save more money. And this will also provide an opportunity for the mutual fund industry to have more inflows of funds and more savings from a consumer standpoint, says Rachit Chawla, CEO Finway FSC.
2. Passive ELSS funds will likely have a lower expense ratio of 10-25 bps compared to active schemes which charge over 1%. With a lower expense ratio, investors will be able to get better returns over the long term.
“The passive ELSS are much cheaper with a lower expense ratio as compared to the active ones. Along with the tax benefit, a lower expense ratio is something wherein investors will get directly benefited, and they will be able to save more money,” says Mahesh Shukla, CEO, PayMe.
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3. Investment in ELSS schemes qualifies for tax deduction under Section 80C. ELSS investments have a three-year lock-in period, which is the shortest lock-in period compared to other tax-efficient products like PPF, NSC, and 5-year FD under Section 80C.
4. Experts say that SEBI’s move will also provide an opportunity for the mutual fund industry to have more inflows of funds and more savings from a consumer standpoint.
“This also opens up opportunities for the mutual fund industry to have more inflows of funds and more savings from a consumer standpoint,” says Shukla.
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5. ELSS funds are required to invest at least 80% of their assets in equity-related instruments. Passive ELSS will allow investors to get exposure to Nifty companies through a passive fund. They will be able to harness the benefit of equity investing while saving tax and diversifying their portfolio.
(Disclaimer: Mutual fund investments are subject to market risks. Please consult your financial advisor before investing)