scorecardresearchWhy passive mutual funds in ELSS category are a much needed reform

Why passive mutual funds in ELSS category are a much needed reform

Updated: 31 May 2022, 10:43 AM IST
TL;DR.

In a circular - Development of Passive Funds - released on May 23, Sebi has allowed fund houses to launch a passive ELSS fund. But, with a catch.

Is this dawn of a new era as passive investment gets SEBI nod in ELSS?

Is this dawn of a new era as passive investment gets SEBI nod in ELSS?

Passive funds in India are gaining popularity. The sheer simplicity and low-cost make it attractive for DIY (do-it-yourself) investors. When it comes to tax-saver funds, however, one doesn’t have a ‘passive’ comfort. All Equity-linked savings schemes are active funds that invest at least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, as notified by the Ministry of Finance.

The good news is you may soon have a passive ELSS fund.

In a circular – Development of Passive Funds – released on May 23, Sebi has allowed fund houses to launch a passive ELSS fund. But, with a catch.

This is a matter of either and or. “Mutual funds can launch either of the following ELSS schemes in open ended Scheme Category, subject to compliance with guidelines on Equity Linked Saving Scheme, 2005 notified by Ministry of Finance – i. Active ELSS Scheme; ii. Passive ELSS Scheme (through Index Fund),” reads the Sebi circular.

The fund houses can base their passive ELSS funds with any of the indices comprising equity shares from top 250 companies in terms of market capitalization.

Now that most fund houses already have an active ELSS scheme, the scope for ELSS passive funds reduces. Even a fairly new fund house Navi Mutual Fund has an ‘ELSS Tax Saver Fund’ with an AUM of over 30 crore.

Why only active or passive, you wonder!

The reason lies in the government notification, Equity Linked Saving Scheme, 2005. “Sebi must have had an intent to allow all fund houses to have a passive ELSS fund, but the government notification categorically says all fund houses can only have one ELSS fund. The notification needs to be amended before Sebi allows us to have both types of ELSS funds,” says spokesperson of a leading fund house.

This is how the government notification reads - The Unit Trust or the Mutual Fund may at their discretion operate one Open Ended Equity Linked Saving Plan with the prior approval of the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992 (15 of 1992).

“We believe AMFI will pursue it with the government and the regulator. The government notification needs a relook,” the person adds.

Meanwhile, new AMCs such as Zerodha, Samco MF or NJ AMC may consider launching a passive ELSS fund to attract customers.

Why passive funds in ELSS are needed

Since ELSS funds come with a lock-in period of three years. It is believed that these funds tend to perform better than their respective benchmarks. If the funds are locked, the fund managers have the liberty to think long-term instead of being bothered about showcasing short-term performance.

So, do ELSS funds really beat the benchmark? Yes and No.

SPIVA India Scorecard, a report by S&P Dow Jones Indices, shows that while 73.17 percent of ELSS funds outperformed the benchmark (S&P BSE 200) in the one-year ending in December 2021, the tables turned in the longer horizon.

Over the three, five and 10-year periods ending in December 2021, 63.41%, 79.07%, and 58.33% of funds underperformed the benchmark, respectively.

The scenario is hardly different from how large cap equity funds compare against their benchmarks, that is, S&P BSE 100. Over the one-year period ending in December 2021, the S&P BSE 100 was up 26.53%, with 50% of the funds underperforming the benchmark. “Over longer horizons, the majority of the actively managed large-cap equity funds in India underperformed the large-cap benchmark, with 67.61% of large-cap funds underperforming over the 10-year period ending in December 2021,” the report says.

That said, the Sebi is rightful about introducing passive funds in the ELSS category. However, the market regulator should allow all fund houses to have a passive ELSS product the way they have in the large cap category.

Aprajita Sharma is a freelance journalist and a certified financial planner. She can be reached at @apri_sharma on Twitter and LinkedIn.

Article
You can save tax by investing in ELSS funds. 
First Published: 30 May 2022, 06:13 PM IST