Home / Mutual Funds / News /  New mutual fund rule: How new ELSS passive funds will differ from existing schemes

The move by capital markets regulator Sebi to allow mutual funds to launch passively managed Equity-Linked Savings Schemes (ELSS) will allow a cost-effective tax-saving alternative to individual investors. ELSS funds are basically tax saving equity mutual funds, in which majority of the funds are invested in stocks. They come with a lock-in period of 3 years. Under Section 80C, investment of up to 1.5 lakh in a financial year in eligible instruments (including ELSS) are exempt from tax. 

Sebi, in its May 23 circular, said mutual funds can either launch an actively-managed ELSS scheme or a passively-managed one - but not in both categories. 

Currently, all ELSS mutual funds are actively managed by a fund manager. Once passive ELSS funds are launched, the allocation in them will be based on one of the indices comprising equity shares from top 250 companies in terms of market capitalization. 

Here are five things to know about the new ELSS fund rules:

1) According to the Sebi circular, which will become effective from July 1, the passive ELSS scheme should be based on one of the indices comprising equity shares from top 250 companies in terms of market capitalisation.

2) This means, the passive ELSS funds may be benchmarked to indices such as Nifty 50, Nifty Next 50, Nifty100.

3) For clarity for investors, the nomenclature for index funds shall include the name of the underlying index in the name of the ELSS scheme, Sebi said.  

5) Piyush Gupta, Director - Funds Research, Crisil Ltd, said that the advent of passively managed ELSS provides a cost and tax-saving alternative to individual investors but 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 already have an active plan in their offerings.

6) For example, Axis Long Term Equity Fund, an ELSS fund, charges an expense load of 1.68% on its regular plans.  On the other hand, Axis Nifty 50 Index Fund - Regular Plan - an index fund based on Nifty 50 - charges 0.4% as expense ratio. 

7) "The step to allow mutual fund houses to launch equity-linked savings schemes as the passively managed fund is a positive move to scale indexing proposition for retail investors. But we need to see how fund house will deal with the option to have either actively managed ELSS fund and passively managed ELSS funds but maybe new fund houses who don’t have ELSS fund can capture this opportunity," says Tarun Birani, Founder & CEO, TBNG Capital Advisor.

8) According to latest AMFI data, the ELSS category had 1.5 lakh crore assets as of April 2022 and there were 39 schemes across different fund houses. 


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