Sebi allows mutual funds with active ELSS to launch passive schemes

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Capital markets regulator Sebi has allowed mutual funds with active Equity-Linked Savings Schemes (ELSS) to launch passive schemes, a move that will provide a cost-effective and tax-saving alternative to individual investors.

Earlier, mutual funds were allowed to either launch an actively-managed ELSS scheme or a passively-managed one but not in both categories.

In a communication to asset management companies (AMCs), Sebi said, “Mutual funds having existing actively managed open-ended ELSS scheme may launch passively managed open-ended ELSS schemes after stopping fresh inflows/ subscription to existing actively managed open-ended ELSS scheme”.

The regulator has also specified the procedure for launching a passive ELSS scheme by a mutual fund house, which already has an actively-managed ELSS scheme.

Under the procedure, Sebi said that the fund house will have to stop all fresh inflows or subscriptions, including systematic investment plans (SIPs) and systematic transfer plans (STPs), to the actively managed ELSS scheme. This needs to be done after a written communication about the proposed change, along with reasons and benefits of such change, is sent to each unitholder.

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Besides, AMCs will provide an option to investors to redeem their units without exit load subject to lock-in requirements. Further, AMCs would have to give an advertisement about the closure of the existing actively managed scheme in a newspaper.

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

Industry experts believe Sebi’s move will massively benefit investors as passive ELSS are much cheaper compared to an active ones.

The investments under the ELSS scheme have a three-year lock-in period, which is the shortest lock-in period as compared to other tax-efficient products. Furthermore, investors can also get a tax deduction of up to Rs 1.5 lakh per financial year under Section 80C of the IT Act.

“The passive ELSS are much cheaper with a lower expense ratio as compared to the active ones. Along with the tax benefit, a lower expense ratio is something wherein investors will get directly benefited, and they will be able to save more money.

“This also opens up opportunities for the mutual fund industry to have more inflows of funds and more savings from a consumer standpoint,” Mahesh Shukla, CEO and founder PayMe, said.

Rachit Chawla, CEO Finway FSC, said that the move gives investors a tax advantage and they will be able to save more money. This will also provide an opportunity for the mutual fund industry to have more inflows of funds and more savings from a consumer standpoint.

In May, Sebi had said that 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 the top 250 companies in terms of market capitalisation.