The Securities and Exchange Board of India has allowed mutual funds having existing active equity-linked savings schemes (ELSS) to launch passive ELSS schemes, provided fresh flows to such existing active schemes are halted.
Earlier, asset managers could launch either active or passive ELSS schemes.
Investment under ELSS schemes comes with a three year lock in and qualifies for deduction under section 80C of the I-T Act for an amount up to Rs 1,50,000 every financial year. It has one of the lowest lock-in period as compared to other tax-saving products. For instance, PPF, a popular instrument with investors, comes with a higher lock-in of over 15 years.
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Passive ELSS will be cheaper, with lower expense ratio of 10-25 bps compared to active schemes which charge over 1%. A lower expense ratio can help investors get higher returns, especially over a longer term of 10-15 years, according to experts.
An ELSS must invest at least 80% of its assets in equity and equity-related instruments.
The assets under management (AUM) of the ELSS category stood at over Rs 1.5 trillion as on December 31, 2022.
In December, IIFL Mutual Fund announced the new fund offer for India’s first tax saver index fund, IIFL ELSS Nifty 50 Tax Saver Index Fund’ benchmarked on Nifty50 index.
“Taking exposure to the Nifty companies through a passive fund is an opportunity for investors to harness the growth potential of equities, reduce tax outgo, lower the cost of investing, and gain diversified exposure,” said Parijat Garg, Fund Manager, IIFL AMC.
In a circular last year, the regulator allowed MF houses to introduce passive ELSS schemes from July 1, 2022.
The passive ELSS scheme shall be based on one of the indices comprising of equity shares from top 250 companies in terms of market capitalisation.
Fund houses stopping fresh flows in existing active schemes have to give an option to investors to redeem units without exit load, subject to lock-in requirements.