Passive ELSS

About Passive ELSS Mutual Funds

Passive ELSS (Equity-Linked Savings Schemes) funds are a type of ELSS fund that tracks a specific market index, such as the Nifty 50 or the Sensex. The fund manager does not try to outperform the market but instead aims to replicate the index's performance. The underlying assets in these funds will consist of equities from the top 250 companies based on market capitalisation. The Securities and Exchange Board of India (SEBI) issued a circular on May 23, 2022, allowing Asset Management Companies (AMCs) to offer passive ELSS mutual funds, which are essentially index funds. This change came into effect on July 1, 2022. SEBI categorises these passive ELSS mutual funds under "other schemes" alongside traditional index funds and Fund of Funds (FoF). In contrast, existing ELSS funds are now referred to as active ELSS funds and belong to the equity mutual funds category. It's important to note that AMCs can offer either active ELSS funds or the newly introduced passive ELSS funds, but not both simultaneously.

How Do Passive ELSS Funds Work?

Passive ELSS funds track a specific market index. This means that the fund manager does not try to outperform the market but instead aims to replicate the performance of the index. To do this, the fund manager invests in the same stocks as the index and in the same proportion. For example, if the Nifty 50 index includes Reliance Industries at a weight of 10%, then a passive ELSS fund tracking the Nifty 50 index will invest 10% of its assets in Reliance Industries. The fund manager will also periodically rebalance the portfolio to ensure it remains aligned with the index composition.

Features of Passive ELSS Mutual Funds

• Track a market index: Passive ELSS funds track a specific market index. This means that the fund manager does not try to outperform the market but instead aims to replicate the performance of the index.
• Lower risk: These funds are generally less risky than active ELSS funds, as they track a diversified market index. This means that the fund's performance is less likely to be affected by the performance of any individual stock or sector.
• Lower expense ratio: Passive ELSS funds have lower expense ratios than active ELSS funds, as the fund manager does not need to research and trade stocks actively. This means that investors keep more of their returns.
• Transparency: Passive ELSS funds are more transparent than active ELSS funds, as their investment strategy is based on a well-defined market index.
• Tax benefits: Passive ELSS funds offer the same tax benefits as active ELSS funds.

Advantages of Investing in Passive ELSS Funds

• Passive ELSS funds come with a tax-saving benefit, where you can save up to ₹46,800 per annum on taxes.
• As these funds track benchmark indices, you will be exposed to the top companies in the market.
• As they are not actively managed, the expense ratio of the fund is lower compared to ELSS funds.

Risks Involved in Passive ELSS Funds

Here are some of the key risks involved in passive ELSS funds:

• Similar to any equity investment, passive ELSS funds are subject to the same market risk. This means that the value of your investment can go down as well as up, depending on the performance of the stock market.
• These passively managed ELSS funds have a lock-in period of 3 years. This means that you cannot withdraw your investment for the first 3 years.

Factors To Consider Before Investing in Passive ELSS Mutual Funds

Before investing in passive ELSS mutual funds, it is important to consider the following factors:

• Expense ratio: The expense ratio is the fee the fund manager charges to manage the fund. Lower expense ratios mean that you keep more of your returns.
• Fund manager's track record: Even though passive ELSS funds track an index, the fund manager still plays an important role in managing the fund. Look for a fund manager with a good track record of managing passive funds.
• Investment tenure: Passive ELSS funds have a lock-in period of 3 years. This means that you cannot withdraw your investment for the first 3 years. Consider your investment horizon before investing in passive ELSS funds.
• Suitability: Passive ELSS funds may not be suitable for all investors. If you are not comfortable with market risk, you may want to consider other investment options.

Who Should Invest in Passive ELSS Mutual Funds?

Passive ELSS funds can be a suitable investment option for individuals who seek a tax-saving investment with lower risk. They are particularly well-suited for investors who:

• Prioritise long-term wealth creation: These funds offer exposure to the broader market, aiming to replicate the performance of a specific index. This strategy aligns with long-term investment goals, where consistent growth is favoured over short-term market fluctuations.
• Prefer a hands-off investment approach: Passive ELSS funds require minimal active management as they track a predefined index. This suits investors who prefer a less involved approach to investing, letting the fund track the market without requiring frequent decision-making.
• Seek lower investment costs: Passive ELSS funds typically have lower expense ratios than actively managed ELSS funds. This means a larger portion of the returns remains with the investor, maximising their long-term gains.
• Value transparency and predictability: Passive ELSS funds follow a transparent investment strategy, mirroring the composition of a specific index. This predictability gives investors a clear understanding of the fund's investment approach and expected performance.
• Seek tax benefits under Section 80C: Most importantly, passive ELSS funds offer tax deductions under Section 80C of the Income Tax Act, making them an attractive option for tax-saving investments.

Taxability of Passive ELSS Funds

ELSS funds come with a lock-in period of 3 years, so there are no short-term capital gains (STCG). If the long-term capital gains on the fund are more than ₹1 lakh, the gains will be taxed at 10%. In addition, investors can claim a tax deduction of up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961, for investments made in passive ELSS funds.

How To Invest in Passive ELSS Funds?

Investing in the Passive ELSS Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps: Step 1: Log in to your Angel One account. Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents. Step 2: Determine a Passive ELSS fund that suits your needs and risk profile. You can learn more about each Passive ELSS fund on the Angel One app. Things to consider at this stage are:

1. Search for the fund you want to invest in.
2. Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
3. Evaluate the fund’s level of risk, its ratings and expense ratio.

Step 3: Once you finalise the Passive ELSS fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.

1. Decide whether you want to invest via SIP or make a one-time investment
2. Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
3. After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.

Top 10 Passive ELSS Mutual Funds to Invest in

SBI ELSS Tax Saver Fund

SBI ELSS Tax Saver Fund is managed by Milind Agrawal and was launched on March 31, 1993, with the S&P BSE 500 serving as its benchmark. The fund aims to provide investors with the advantages of investing in a diversified portfolio of equity shares while also enabling them to claim tax deductions under Section 80C of the Income-tax Act, 1961. Investments made in the fund are subject to a mandatory lock-in period of three years from the date of allotment to qualify for the tax benefits under Section 80C. It has an expense ratio of 0.92%. 

Motilal Oswal ELSS Tax Saver Fund

Motilal Oswal ELSS Tax Saver Fund is managed by Ajay Khandelwal, Rakesh Shetty, and Atul Mehra, and it was launched on January 21, 2015. It is benchmarked against the S&P BSE 500 index. The primary aim of the fund is to achieve long-term capital growth by investing in a diversified portfolio that mainly consists of equity and equity-related instruments. It has an expense ratio of 0.64%. 

SBI LT Advantage Fund-V

SBI LT Advantage Fund-V, managed by Nidhi Chawla, was launched on March 27, 2018, and is benchmarked against the S&P BSE 500 index. Its objective is to achieve capital appreciation over a ten-year period by primarily investing in equity and equity-related instruments of various companies, while also offering income tax benefits to investors. However, there is no guarantee that the stated investment objective will be successfully achieved. It does not have an available expense ratio. 

WOC ELSS Tax Saver Fund

WOC ELSS Tax Saver Fund, managed by Ramesh Mantri, Piyush Baranwal, Trupti Agrawal, Ashish Agrawal, and Dheeresh Pathak, was launched on October 14, 2022, and is benchmarked against the S&P BSE 500 index. Its investment objective is to deliver capital appreciation and income by primarily investing in a portfolio of equity and equity-related instruments. However, there is no assurance or guarantee that the scheme will achieve its stated investment objective. It has an expense ratio of 0.67%. 

HDFC ELSS Tax Saver

HDFC ELSS Tax Saver scheme is managed by Amar Kalkundrikar and Dhruv Muchhal and was launched on March 31, 1996, with the S&P BSE 500 as its benchmark. Its primary objective is to generate capital appreciation and income by predominantly investing in a portfolio of equity and equity-related instruments. However, there is no guarantee that the scheme will achieve its stated investment objective. It has an expense ratio of 1.08%. 

DSP ELSS Tax Saver Fund 

DSP ELSS Tax Saver Fund is managed by Rohit Singhania and was launched on January 18, 2007, with the S&P BSE 500 as its benchmark. Its primary objective is to deliver medium- to long-term capital growth by investing in a diversified portfolio that is largely made up of equity and equity-related securities of corporate entities. It has an expense ratio of 0.67%. 

Sundaram LT Tax Adv Fund-Sr IV

Sundaram LT Tax Adv Fund-Sr IV, managed by Rohit Seksaria and Sudhir Kedia, was launched on July 5, 2018, and is benchmarked against the S&P BSE 500. Its objective is to achieve capital appreciation over a ten-year period by primarily investing in equity and equity-related instruments of companies classified as micro-cap, while also enabling investors to benefit from available income tax advantages. It has an expense ratio of 1.18%. 

JM ELSS Tax Saver Fund

JM ELSS Tax Saver Fund, managed by Asit Bhandarkar, Deepak Gupta, Ruchi Fozdar, and Satish Ramanathan, was launched on March 31, 2008, and is benchmarked against the S&P BSE 500. Its investment objective is to deliver long-term capital appreciation through a diversified and actively managed portfolio of equity and equity-related securities, while also allowing investors to claim tax deductions as permitted under the Income Tax Act, 1961. It has an expense ratio of 1.01%.

Baroda BNP Paribas ELSS Tax Saver Fund

Baroda BNP Paribas ELSS Tax Saver Fund, managed by Sanjay Chawla and Pratish Krishnan, was launched on January 5, 2006, and is benchmarked against the S&P BSE 500. It aims to achieve long-term capital growth through a diversified and actively managed portfolio of equity and equity-related securities, while also offering investors tax rebate benefits as applicable from time to time. It has an expense ratio of 1.00%. 

HSBC ELSS Tax Saver Fund

HSBC ELSS Tax Saver Fund, managed by Abhishek Gupta and Mayank Chaturvedi, this scheme was launched on February 27, 2006, and is benchmarked against the S&P BSE 500. The fund seeks to deliver long-term capital appreciation by investing primarily in a diversified portfolio of equity and equity-related securities. However, there is no assurance that the scheme’s investment objective will be achieved. It has an expense ratio of 1.17%.