Passive ELSS Funds are a newer category of Equity Linked Savings Schemes (ELSS) in India which aim to replicate the performance of a specific equity index rather than relying on active stock selection by fund managers. These funds are typically structured as index funds or ETFs that track an index like the Nifty 50 or Sensex. Passive ELSS funds offer a low-cost, transparent and straightforward investment approach that tracks the performance of a market index. They are a good choice for long-term investors seeking consistent returns with minimal management fees. While they may not outperform the market, they offer a reliable option for investors who want exposure to a broad market index without taking on the higher risk or costs associated with active management.
Differences between Passive ELSS Funds and Traditional Active ELSS Funds
| S. No. | Particulars | Active ELSS Funds | Passive ELSS Funds |
|---|---|---|---|
| 1 | Management Style | These funds are actively managed by fund managers who make investment decisions based on research, stock analysis, and market trends. The goal is to outperform the benchmark index. | These funds are passively managed and aim to replicate the performance of a specific equity index (e.g., Nifty 50, Sensex). There is minimal stock selection or active decision-making involved. |
| 2 | Objective | The objective is to beat the benchmark index and provide higher returns than the market by selecting stocks that the fund manager believes will perform better. | The objective is to match the performance of the chosen index. The fund invests in the same proportion as the index, aiming for the same returns. |
| 3 | Fund Expenses | Typically have higher expense ratios due to the costs associated with active management, research, and frequent trading. | Generally, have lower expense ratios because they do not involve active management or research, as the fund merely tracks the index. |
| 4 | Stock Selection | The fund manager selects stocks based on research, market analysis, and predictions, aiming to pick the best-performing stocks. | The fund holds the same stocks as the benchmark index, in the same proportion, with little to no deviation. |
| 5 | Risk | There is a higher risk as the fund manager might pick stocks that underperform, leading to possible underperformance compared to the benchmark. | The risk is generally lower compared to active funds since the fund tracks a well-diversified index and reflects the broader market performance. |
Advantages of Passive ELSS Funds
1. Lower Costs
Passive ELSS funds generally have lower expense ratios compared to actively managed funds. This is because there are no active stock selections, and the funds simply track the index. Lower management fees mean that more of your returns stay invested, increasing the overall performance over the long term.
2. Transparency
Since passive funds track an index, their holdings and performance are more transparent. Investors can easily see which stocks are in the index and track the performance of the fund against the index.
3. Consistent Performance
Passive ELSS funds aim to mirror the performance of the index. Investors can expect relatively consistent returns that align with the broader market or the chosen benchmark index over the long term, assuming the market performs well.
4. Tax Benefits
Like all ELSS funds, passive ELSS funds are eligible for tax deductions under Section 80C of the Income Tax Act, allowing investors to save up to ₹1.5 lakh annually. They also come with a lock-in period of 3 years which is shorter than many other tax-saving investment options.
5. Diversification
Because passive ELSS funds invest in the same stocks as the index (such as the Nifty 50 or Sensex), they offer automatic diversification across multiple sectors and stocks. This reduces the risk associated with investing in individual stocks.
6. Ideal for Long-Term Investors
For investors who prefer a “buy-and-hold” strategy and are not focused on short-term market movements, passive ELSS funds are a good option. Over time, these funds can potentially generate stable returns, especially in a growing market.
7. Ease of Investment
Passive ELSS funds offer a simple and straightforward investment approach. Since they track an index, there is little complexity in terms of decision-making or understanding the fund’s strategy. This makes them suitable for investors who don’t want to spend time researching individual stocks.
Popular Passive ELSS Funds in India
| Scheme Name | Benchmark | Fund Size (₹ in cr) | Expense Ratio | Lock In period | Return 1 Year (%) | Return 1 Year (%) Benchmark |
|---|---|---|---|---|---|---|
| 360 ONE ELSS Tax Saver Nifty 50 Index Fund | NIFTY 50 Total Return Index | 75 | 0.27% | 3 years | 21.48% | 21.90% |
| Navi ELSS Tax Saver Nifty 50 Index Fund | NIFTY 50 Total Return Index | 70 | 0.10% | 3 years | 21.49% | 21.90% |
| Zerodha ELSS Tax Saver Nifty Large Midcap 250 Index Fund | NIFTY Large Midcap 250 Total Return Index | 135 | 0.27% | 3 years | 29.11% | 29.30% |
Wrapping Up
Passive ELSS funds are an attractive option for investors who prefer a low-cost, transparent approach to equity investment while benefiting from tax exemptions. While their 1-year performance is typically in line with the index, they may not outperform actively managed ELSS funds during periods of market volatility or when sector-specific strategies lead to high returns. However, for long-term investors looking for steady growth with lower management fees, passive ELSS funds present a solid choice.
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