Home / Mutual Funds / News /  Sebi brings clarity on passive ELSS launch procedure

Mutual funds in India can launch passive equity-linked savings scheme (ELSS) but only after the closure of the existing actively-managed ELSS fund for subscription, markets regulator Securities and Exchange Board of India or Sebi said in a circular.

The passive ELSS category, which will also be eligible for tax benefits, was introduced by the regulator in May 2022 through a circular titled - Development of Passive Funds.

Like any passive fund, the scheme will also generate returns by mimicking the underlying index. The fund will be based on any index comprising shares from the top 250 companies in terms of market capitalization. It was already stated in the earlier circular that a fund house can either have an active ELSS scheme or a passive ELSS scheme, not both.

In the recent circular, the procedure for launching a passive ELSS scheme by a fund house already having an actively-managed ELSS scheme has been highlighted.

Firstly, the fund house must stop all fresh inflows/ subscriptions including systematic investment plans (SIPs) and systematic transfer plans (STPs) to the actively managed ELSS scheme. This is after a written communication about the proposed change is sent to each unitholder.

An option for investors to redeem their units without exit load shall also be given the fund house, subject to lock-in requirements.

Asset management companies are also required to give an advertisement about the closure of the existing actively managed scheme in a newspaper.

After completing three years from the date of stopping inflows in the actively managed ELSS scheme, it will be merged with the passively managed ELSS scheme and the investments would be managed through the latter.

Commenting on the circular, Arihant Bardia, CIO and co-founder, Valtrust said, "This was long due and a move in the right direction. The main reason for an investment in ELSS is saving tax and often schemes are not even analysed by the investors on its merit. In such a scenario passive index makes a good choice. Ideally, this should also be implemented is in NPS and choice should be given to investors to participate in passive indices. AMCs which have a poor track record on active ELSS will launch passive ELSS but those with a good track record may not jump the gun."

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