While investing to save taxes, you might have looked for ‘top ELSS mutual funds’, ‘best ELSS fund’ and more on Google. Have you ever wondered if passive ELSS mutual funds exist? This is because in recent years, low-cost index funds have gained popularity in India with a plethora of funds with different index benchmarks being launched.
Passive ELSS mutual funds are a newer category of ELSS mutual funds in India. Index funds in the Equity Linked Savings Schemes (ELSS) category did not exist until recently. Before we get into Passive ELSS mutual funds, let’s have a quick look at what ELSS investments and Passive Funds are.
What are ELSS Mutual funds?
An ELSS fund, or equity-linked savings scheme, is the only type of mutual fund eligible for tax deductions under Section 80C of the Income Tax Act, 1961.
As the name suggests, this scheme primarily invests in equity and equity-related instruments to generate returns. It comes with a lock-in period of three years for each investment.
As an investor, you can choose to invest in ELSS funds either through SIP (Systematic Investment Plan) or in a lump sum. Investments up to ₹1.5 lakhs in these funds are eligible for tax deduction in a financial year.
What are Passive Mutual Funds?
Passive mutual funds are designed to track or mimic the performance of an underlying benchmark, such as Nifty50, Nifty 100, or Sensex.
These passive investments have become quite popular because they offer various benefits like lower costs, transparency and are free from the biases of fund managers.
What are Passive ELSS funds?
So, what are Passive ELSS funds? You can easily guess now. To reiterate, passive ELSS mutual funds generate returns by tracking a specific market index. You can even call them Index ELSS.
Until May 2022, all the ELSS funds offered by fund houses were actively managed. However, on May 23rd, 2022, SEBI issued a circular allowing Asset Management Companies (AMCs) to introduce passive ELSS mutual funds, which are index funds, starting from July 1st, 2022.
AMCs can offer only one ELSS fund. Therefore, AMCs that already have an active ELSS fund, cannot offer passive funds. As a result, only the new Fund houses have launched Passive ELSS Funds.
What are the benefits of Index ELSS funds?
1. Lower Expense Ratio
In active funds, a fund manager and a team of investment analysts track companies, conduct extensive research, crunch numbers and review annual reports and presentations to make buy or sell decisions. This expertise comes at a cost, which is passed on to investors. In contrast, index funds do not incur these costs, resulting in a significantly lower expense ratio.
The Expense ratio for the three schemes in the passive ELSS space is less than 30 basis points (bps). Whereas, in the active ELSS funds, the expense ratio can be in the range of 60-120 bps with the total expense ratio (TER) of some funds reaching up to 160 bps.
| Passive ELSS Funds | Expense Ratio |
|---|---|
| 360 ONE ELSS Tax Saver Nifty 50 Index Fund(G)-Direct Plan | 0.27 |
| Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund(G)-Direct Plan | 0.25 |
| Navi ELSS Tax Saver Nifty 50 Index Fund(G)-Direct Plan | 0.10 |
Find below Expense ratio of 15 Active ELSS funds sorted on the basis of total expense ratios from lowest to highest.
| Navi ELSS Tax Saver Fund(G)-Direct Plan | 0.37 |
|---|---|
| ITI ELSS Tax Saver Fund(G)-Direct Plan | 0.48 |
| NJ ELSS Tax Saver Scheme(G)-Direct Plan | 0.49 |
| Canara Rob ELSS Tax Saver(G)-Direct Plan | 0.53 |
| Groww ELSS Tax Saver Fund(G)-Direct Plan | 0.55 |
| Kotak ELSS Tax Saver Fund(G)-Direct Plan | 0.58 |
| Mahindra Manulife ELSS Tax Saver Fund(G)-Direct Plan | 0.60 |
| Mirae Asset ELSS Tax Saver Fund(G)-Direct Plan | 0.60 |
| Parag Parikh ELSS Tax Saver Fund(G)-Direct Plan | 0.61 |
| Bandhan ELSS Tax Saver Fund(G)-Direct Plan | 0.64 |
| Motilal Oswal ELSS Tax Saver Fund(G)-Direct Plan | 0.68 |
| WOC ELSS Tax Saver Fund(G)-Direct Plan | 0.68 |
| Edelweiss ELSS Tax saver Fund(G)-Direct Plan | 0.69 |
| Tata ELSS Tax Saver Fund(G)-Direct Plan | 0.72 |
| DSP ELSS Tax Saver Fund(G)-Direct Plan | 0.75 |
2. Free of Fund Manager Biases
Fund Managers can employ various styles, such as growth or value investing. While some styles may work in certain market conditions, they may not always succeed in others.
Increasingly, it has been seen not just in developed markets like the US but also in India that active funds are finding it difficult to beat benchmark indices. According to a widely tracked S&P Indices Versus Active Funds (SPIVA) report, the S&P BSE 100 gained 23.2% in 2023, and 51.6% of active managers underperformed the benchmark over that period.
Our own analysis supports this hypothesis, highlighting the importance of selecting the right index.
Funds underperforming the Indices:
| Indices | 3 Years | 5 Years | 7 Years | 10 Years |
|---|---|---|---|---|
| Nifty 200 - TRI | 22.9% | 24.0% | 48.4% | 20.0% |
| Nifty Large Midcap 250 - TRI | 71.4% | 78% | 67.7% | 72% |
| Nifty 50 TRI | 5.7% | 6% | 25.8% | 0% |
| Total Number of Funds | 35 | 33 | 31 | 25 |
If we analyse the last five years of point-to-point returns for ELSS funds compared to the Nifty 200 TRI Index, we observed that 8 out of 33 funds (24%) underperformed the market index.
Compared to the Nifty LargeMidcap 250 TRI, 26 out of 33 funds (78%) failed to outperform the five-year point-to-point index return.
In contrast, compared to the Nifty50 TRI Index, only 2 out of 33 funds underperformed the five-year point-to-point index return.
3. Transparency
Since passive ELSS funds directly mimics the market index, there is more transparency about the investment strategy and composition.
Finding the Best Passive ELSS Funds
Currently, there are three Index ELSS funds available: two track the Nifty 50 TRI Index and one tracks the Nifty LargeMidcap 250 TRI Index.
| Scheme | Benchmark |
|---|---|
| Navi ELSS Tax Saver Nifty 50 Index Fund(G)-Direct Plan | Nifty 50 TRI |
| 360 ONE ELSS Tax Saver Nifty 50 Index Fund(G)-Direct Plan | Nifty 50 TRI |
| Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund(G)-Direct Plan | Nifty LargeMidcap250 TRI |
If you have a lesser risk appetite and want to stick to large caps, then a fund tracking the Nifty 50 TRI will be suitable for you whereas if you have a higher appetite to take risks, you can opt for a fund tracking the Nifty LargeMidcap 250 TRI Index Fund.
Who should invest in Passive Index ELSS Funds?
Investing in Passive ELSS funds can be better for investors with a lower risk appetite who also seek tax-saving benefits.
These funds can be better for individuals interested in long-term wealth creation and prefer a hands-off approach to investing. They eliminate the need for continuous monitoring and decision making, offering a straightforward way to participate in the market.
In Summary
As markets in India develop, we are witnessing the Efficient Market Hypothesis in action. This means that as information becomes widely available, it will be increasingly difficult for investors to outperform the index over a sustained period. Furthermore, investing to save taxes is a regular annual task for individuals under eligible tax slabs.
If you also believe in the Efficient Market Hypothesis, definitely check out passive Index funds for your ELSS investments.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
