Equity-linked Saving Schemes (ELSS) have been a very popular tax saving instrument, and now the capital market regulator paves the way for cheaper versions of these funds by allowing mutual fund houses to launch passively managed ELSS.

In a circular issued earlier this week, the Securities and Exchange Board of India (Sebi) said, mutual funds can launch passive ELSS schemes based on one of the indices comprising equity shares from top 250 companies in terms of market capitalization.This means the ELSS scheme could be based on a wide variety of indices – Nifty 50, BSE Sensex, Nifty 100, Nifty 200, Nifty Large Midcap 250 indices. This will allow fund houses to offer a wide variety of choices and offer the investors exposure to large and midcap stocks.

The fund could be launched under ‘Other Schemes’ category as per the rules of Categorization and Rationalization of Mutual Fund Schemes. However, mutual funds could either offer an actively managed ELSS or a passively managed ELSS. 

A passively managed fund is one in which the fund tries to replicate the composition of a particular stock exchange doing away with the need to have a fund manager who actively manages the fund. This saves the cost of active management and makes the fund cheaper for the investors.

This condition that a fund house could either offer an actively managed or a passively managed fund could delay the launch of passively-managed tax saving funds as most existing fund houses already have an actively-managed ELSS.

According to Crisil Ltd, 36 out of 41 fund houses already have actively managed ELSS. The category had around Rs 1.5 lakh crore assets as of April 2022.