Mutual Funds: Decoding Active to Passive ELSS Scheme Switch Move

Markets regulator the Securities and Exchange Board of India (SEBI) has given the green signal to mutual funds with active equity-linked savings schemes (ELSS) to launch passive schemes.

So, what would be the implications of this move on the part of Sebi allowing the switch from active to passive ELSS scheme?

An open-ended ELSS scheme invests a majority of funds in equity and equity-related scheme and has a lock-in period of three years. In actively-managed ELSS schemes, the fund managers are the decision-makers and select stocks as per their judgment. These funds have a higher expense ratio.  

Passive ELSS schemes track pre-determined benchmarks or indices, such as Nifty 50, Nifty 100 or Nifty-200 and so on, comprising equity shares from the top 250 companies in terms of market capitalisation. In this case, there are no fund managers required to manage the fund actively. For this reason, the expense ratio is low for passive ELSS scheme. This also means an investor can look forward to higher returns in the long run. 

If tax-saving is the motive of an investor, then they now will have the choice of a passive ELSS scheme as well. This is unlike earlier when they had to opt only for active funds alone. 

This move of Sebi will ensure more inflow of funds for the mutual funds industry as well as investors will be able to save more money.

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