Passive ELSS opens new avenue for MF investors

New Delhi, May 24: Capital markets regulator Sebi's move to allow mutual funds to launch passively managed equity-linked savings schemes (ELSS) will provide a cost-effective and tax-saving alternative to individual investors, experts said on Tuesday. Apart from these, Sebi has put in place a framework for managing passive funds—exchange traded funds (ETFs) and index funds—amid growing popularity of such funds amongst retail investors.

The Sebi, in its circular, on Monday said mutual funds can either launch an actively managed ELSS scheme or a passively managed one but not in both categories. The passive ELSS scheme should be based on one of the indices comprising equity shares from top 250 companies in terms of market capitalisation.

Piyush Gupta, directorfunds research, Crisil Ltd, said that Sebi's move to push passive debt funds is doubly beneficial.

One, it will offer a lowcost option to those seeking to invest in actively managed fixed-income-oriented funds. Two, it will create liquidity for such products, which, in turn, would deepen India's corporate bond market.

"The advent of passively managed ELSS provides a cost and tax-saving alternative to individual investors," he said.

According to him, the category had Rs 1.5 lakh crore assets as of April 2022 and how fund houses take to this will have to be seen since they were asked to choose between active and passive variants, and most (36 out of 41 fund houses) have an active plan in their offerings.

Under the new framework, the regulator has laid down guidelines for debt ETFs and index funds, its constitution, market making framework for ETFs, investor education and awareness charges, disclosure guidelines and other provisions.

The regulator has aligned portfolio construction practices in line with active funds by specifying the issuer, group, and sector-concentration limits.

For an index that has 80 per cent exposure to corporate debt securities, the single issuer limit on AAA-rated securities is set at 15 per cent, for AA-rated securities, the limit is fixed at 12.5 per cent and single A-rated securities cannot constitute more than 10 per cent weight in an index.

For an index based on GSec and state government bonds, a single issuer limit will not be applicable.

"The measures announced by Sebi is a big welcome step to the overall growth of passive funds. The norms on debt ETF or index fund will certainly help broaden the debt passive fund product offering," Mahavir Kaswa, head of research, passive unds at Motilal Oswal AMC, said.

The Sebi has also specified that the iNAV (indicative net asset alue) needs to be disclosed continuously— with 15-second lag for equity ETFs— and four times a day for debt ETFs.