Fund Query: Is there an ELSS fund that looks like an index fund? 

I would like to know whether there is any ELSS fund that has a portfolio like the Nifty. In other words, is there an ELSS fund that looks like an index fund?

Hari Shankar

Your question comes at a time when the market regulator SEBI announced last Monday (May 23) that mutual funds can offer either an active ELSS or a passive ELSS (index fund) from July 1 onwards, as explained in this article. ).

After the new scheme categorisation norms announced by SEBI in October 2017, fund houses were allowed to offer only one ELSS each. Thus, currently, there are 36 actively managed ELSS funds being offered, as against the 41 mutual fundhouses that are operational. If any of these 36 AMCs want to switch over to passive ones, it could involve stopping inflows into existing active one/phasing out the exit of existing investments. The fund house may also choose to merge the active scheme with a new passive scheme that they may launch, after providing exit option for existing investors.

On the other hand, the 5 fund houses that don’t yet have ELSS offerings — IIFL, NJ, Samco, Trust, White Oak Capital — may decide to launch only passive ones. Thus, the possibilities are quite a few and one needs to wait and watch as to what the fine print of the rules will allow and what strategy each AMC will adopt. Currently most actively managed ELSS schemes are benchmarked to the Nifty 500 or the BSE 500. As per the SEBI circular, 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. Thus, passive ELSS based on the Nifty, that you are asking for, may come up soon. A combination of large & mid-cap or pure mid-cap passive ELSS schemes and even smart beta ones may be launched. Thus, with clear demarcation, investors may be able to choose ELSS according to their risk appetite. Currently all ELSS schemes are clubbed as one basket though the investing styles, and hence the risk-return aspects, are varied across offerings of fund houses.

Here is another perspective on ELSS for you to mull over. The limit for tax-saving under Section 80C is only ₹1.5 lakh. If you are young or middle aged, investing in PPF is a safe and rewarding way to exhaust what is left of the limit beyond other savings/expenses which qualify for 80C deduction. In fact, even if you don’t have any other qualifying investments or expenses for 80C deduction, you can invest the entire ₹1.5 lakh in PPF. The ‘EEE’ nature of the instrument and its sovereign guarantee makes it very attractive. The 15-year lock-in can yield a substantial sum for long-term goals at zero risk. With plenty of mutual funds and categories to choose from, you need not particularly invest in ELSS to build a mutual fund portfolio. If you are keen on a fund tracking the Nifty index, you can choose normal index funds too.

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