IIFL Mutual Fund launched its first-of-its-kind “IIFL ELSS Nifty50 Tax Saver Index Fund” on December 01, 2022. The subscription for this new fund offer (NFO) would be open till December 21, 2022, post which it would be available for resale and purchase from January 02, 2023.
Mutual funds help to generate wealth, especially, equity funds whose returns not only beat inflation but also help amass enough wealth in the long run. Debt funds also help in their own way for risk-averse investors who earn enough from them without fearing the effect of volatility inherent in the market. The returns earned from them are taxed as per the regulations under the Income Tax Act, 1961. This is where the ELSS mutual funds step in as they help to save on taxes. You can invest in these tax-saving equity mutual funds as contributions up to ₹1,50,000 are eligible for deduction under Section 80C under the current guidelines on taxation. However, investments in these funds come with a hitch. You must stay invested for at least three years as these come with a three-year lock-in period from the date of investment.
Since ELSS funds invest in stocks, the returns on them are not guaranteed. These actively managed funds invest in the same stocks listed in the index depending on the fund manager’s expertise and foresight. Though the lock-in period is three years, many investors stay invested for a prolonged period. The SPIVA India Scorecard by S&P Global highlights how many actively managed funds underperformed when compared to index fund returns over five-year and 10-year periods, respectively.
Are tax-saver index funds worth your investments?
With index funds outperforming actively managed funds, it makes sense to invest in them. The passively managed ELSS index funds seem to provide the much-needed opportunity that alert investors have been waiting for. Agreeing with how this newly launched tax-saver index fund can be a gamechanger for the mutual funds industry, Muthukrishnan, a Chennai-based Certified Financial Planner, says, “This is a boon for believers of passive investing who did not have avenue so far under Section 80C. They can go for it. It gives the dual benefit of indexing and tax savings. Being an index fund, the expense ratio should be less as well. So, it’s cost-saving too.”
Aditya Shah, Founder, JST Investments, goes a step ahead and shares, “Active funds’ underperformance with respect to the index is massive. Given this underperformance, the index ELSS fund can help to check unwarranted losses. Some features of this scheme will include:
- The scheme will track the Nifty-50 index
- Lower expense ratio than the actively managed ELSS fund
- No chance to underperform the index (apart from the tracking error)
This makes this index ELSS fund a good alternative to underperforming ELSS active funds.”
Relying on passive fund performance can help
The underperformance of actively managed funds, especially, in recent times is a cause of concern. Undoubtedly, the current geopolitical tensions coupled with the fear of recession have pushed many stock prices back to where they were during the pandemic. Tanvi Goyal, Founder, Wealth Aware, opines, “Many large-cap funds are struggling to give the Alpha over and above the index funds, so for investors who prefer passive investment style and who don’t want to spend time in analysing mutual funds or changing them regularly can opt for these funds. Also, the low cost associated with Index Funds will help retail investors at large. I see it as a very attractive option for people who want to start making investment decisions themselves. Since the scheme offers only the Nifty50 stocks in the portfolio, the volatility will be lesser as compared to other multi-cap funds, it will help push the people who have been sitting on the fence and have yet to begin their journey into equity investing.”
Debating active vs passive fund investments
However, not all analysts and experts are buying the passive investment strategy. For example, Viral Bhatt, Founder, Money Mantra, finds this passive investment strategy quite uninteresting. Expressing his disinterest in the passively managed tax-saving index fund concept, Bhatt expresses, “Equity investment should be for your long-term goals but not for three years’ time horizon. Apart, index funds are not for all. Index fund investing requires a lot of maturity, patience, and sticking to your own strategy. Because if you check active vs passive funds, there are always a few funds that may be outperforming the index. However, how consistently they outperform is the question mark. Adopting index funds requires that maturity to stick to what you adopted. Also, if a fund is offering you an index fund at the lowest cost, then don’t be under a misconception that it will remain the same throughout your investment period.”
Explaining how investing in haste can cause you to suffer unwarranted losses, Bhatt says, “Just because it is the first ELSS Index Fund does not mean you jump and invest immediately. Wait for the fund to accumulate a decent AUM and also let us see how the performance of the fund (by looking at its tracking error and tracking difference), then take a call.”
Why invest in passive ELSS funds?
Though this strategy can help investors look forward to index-linked returns without feeling unsettled about a fund manager’s non-performance, a lot depends on how you view your investments in the long run. Rajani Tandale, Product Head – Mutual Fund, 1finance.co.in, says, “The biggest advantage of investing in passive ELSS funds is there is no fund manager risk involved in this strategy. If you invest in an active ELSS fund and if the fund underperformed the benchmark, you cannot exit as investments are locked in for three years. A passive investment strategy eliminates the risk of fund managers underperforming the benchmark. As the passive category is gaining a lot of popularity in India, investing in passive ELSS funds would be a very good option for retail investors.”