Sebi's approval of MFs to launch passive ELSS will give investors a cost-effective, tax-saving option: Experts

Sebi allows mutual funds to float passively managed equity-linked savings schemes

One, it will offer a low-cost option to those seeking to invest in actively managed fixed-income-oriented funds. Two, it will engender liquidity for such products that, in turn, would deepen India’s corporate bond market, he added. "The advent of passively managed ELSS provides a cost and tax-saving alternative to individual investors," he said.

According to him, the category had Rs 1.5 lakh crore assets as of April 2022 and how fund houses take to this will have to be seen since the regulator has asked them to choose between active and passive variants, and most (36 out of 41 fund houses) already have an active plan in their offerings.

Under the new framework, the regulator has laid down guidelines for debt ETFs and index funds, its constitution, market making framework for ETFs, investor education and awareness charges, disclosure guidelines and other provisions.

The regulator has aligned portfolio construction practices in line with active funds by specifying the issuer, group, and sector-concentration limits. For an index that has 80 percent exposure to corporate debt securities, the single issuer limit on AAA-rated securities is set at 15 percent, for AA-rated securities, the limit is fixed at 12.5 percent and single A-rated securities cannot constitute more than 10 percent weight in an index.

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For an index based on G-Sec and state government bonds, a single issuer limit will not be applicable. "The measures announced by Sebi is a big welcome step to the overall growth of passive funds. The norms on debt ETF or index fund will certainly help broaden the debt passive fund product offering," Mahavir Kaswa, Head of Research, Passive Funds at Motilal Oswal AMC, said.

Sebi has also specified that the iNAV (indicative Net Asset Value) need to be disclosed continuously — with 15-second lag for equity ETFs and at least four times a day for debt ETFs. Kaswa said that a number of steps with respect to market making, iNAV on stock exchange, or disclosure of tracking error and tracking difference would equip investors to make the right choice of passive fund manager.

"The provisions to incentivise market-making for ETFs will address liquidity concerns for both asset management companies and investors. Additionally, disclosure norms with respect to index constituents, tracking error, and tracking difference will offer more comfort to those planning to invest in passive funds," Bhushan Kedar, Director – Fixed Income Research at Crisil Ltd, said. He, further, said that Sebi’s move would address many practical constraints involving passive debt funds in India.

"The previous guidelines specified replication of indices at security or issuer-level replication to a greater extent by passive funds. The new guidelines focus more on duration, interest rate and credit risk-based replication. norms for partial replication of indices, the guidelines have become more streamlined to global practices," he said.

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