The passive fund industry got an impetus with the latest circular issued by capital markets regulator SEBI on May 23 that aims to promote passive funds.
As of now, the passive funds, which include ETFs and index funds, collectively have less than 15 percent of the total AUM (assets under management) of the mutual fund industry.
ETFs are mutual funds which track broader market indices such as Nifty or Sensex or an underlying asset such as gold. As the name suggests, they can be traded in a stock market. And their cost of investing is lower than that of an actively managed fund.
Increase in investors’ interest for index funds & ELSS:
| Fund Categories | No of Schemes (Apr 22) | Net AUM April, 22 ( ₹crore) | Net AUM April, 21 ( ₹crore) |
| ELSS | 39 | 1,46,077 | 1,25,377 |
| Index funds | 94 | 73,994 | 20,426 |
| Gold ETFs | 11 | 20,430 | 15,628 |
| Other ETFs | 124 | 4,12,858 | 2,77,570 |
| FOF investing overseas | 46 | 20,540 | 13,989 |
(AMFI data for April 2022; April 2021)
These are some of the new changes being introduced by the capital markets regulator SEBI via its circular on :
Redemptions: Investors can directly approach the AMC for redemption of units of ETFs, for transactions of up to ₹25 crore without any exit load, in case of certain scenarios.
Indicative net asset value: Sebi has also specified that the iNAV (indicative Net Asset Value) need to be disclosed continuously -- with 15-second lag for equity ETFs and at least four times a day for debt ETFs.
Passive ELSS: In modification to an earlier circular issued on October 6, 2017, SEBI said the fund houses can launch either of the two schemes in the ELSS category: active or passive.
Rebalancing: In case of change in consultations of the index due to periodic review, the portfolio of ETF/ index funds be rebalanced within 7 calendar days
Market making framework: AMC shall appoint at least two market makers who are members of the stock exchanges for ETFs to provide continuous liquidity on the stock exchange platform.
The AMC shall have an approved policy regarding market making in ETFs and shall facilitate in-kind creation and redemption of units of ETFs (including debt ETFs) by market makers on a best effort basis.
Tracking errors: The tracking error (difference in daily returns between the underlying index and the NAV) based on past one year rolling data shall not exceed two percent.
About ELSS funds:
In the latest circular, SEBI said the fund houses can launch either of the two schemes in the ELSS category: active or passive.
But some experts say that there are already active ELSS schemes run by 36 fund houses out of 41, so there is little choice to launch passive scheme when the same fund house can’t launch both active and passive options.
Ankur Kapur, Managing Partner, Plutus Capital says, “Recently, SEBI has issued a circular stating that fund houses can launch passive ELSS funds. This is a positive move only if a fund house is allowed to offer both active and passive ELSS options. Investors will have a choice to opt for passively managed ELSS and thereby save on the expenses. However, if SEBI does not allow a fund house to offer both the options, most of the fund houses may not opt for passive ELSS and may continue with their existing actively managed ELSS,”
The category has nearly ₹1.46 lakh crore net assets under management as of April 2022. ELSS are essentially tax saving mutual funds with a lock-in period of three years. Investment made in ELSS helps one save tax under Section 80C of the Income Tax Act.
“Equity Linked Saving Schemes (ELSS) have generally performed very well in comparison with its peer set. In case of an ELSS, a fund manager usually has a vision for three years plus because of the lock in. The investment calls are usually long-term and hence the performance is better than other multi-cap funds,” says Mr Kapur.
As per the data from industry body Association of Mutual Funds in India (AMFI), over the last one year, index fund folios have more than doubled to almost 2. 55 million from 1.09 million.
The growth rate has been similar for ETFs as well, as the number of folios increased to 10.8 million from 4.5 million. Distributors believe these could go up in the coming year.