In May 2022, SEBI allowed mutual funds to launch either an actively managed open-ended ELSS fund or a passively managed open-ended ELSS fund. In an amendment issued on Jan 10th 2023, SEBI has now allowed those fund houses with an existing active ELSS fund to launch passive ELSS funds.
However, the existing active ELSS funds must first be closed for subscriptions. Existing units will be managed as usual, but we cannot buy more. If closed three years from the closure date, the active ELSS fund will be merged with the passive fund after giving notice to investors.
What is most interesting is the phrase in the circular that this decision is “based on feedback received from stakeholders”.
Why would a fund house stop inflows into an active ELSS fund where they can earn much more and launch a passive ELSS fund? Similarly, why would a distributor recommend a passive ELSS fund over an active ELSS fund when they earn more in the active option?
I think is safe to assume that fund houses with existing active ELSS funds wanted the option to also launch such passive funds, but SEBI did not accept.
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According to AMFI, 20% of index fund average assets under management (AAUM) for the quarter of October – December 2022 is in regular plan passive funds! That is still a significant number since one of the USPs of a passive fund is its low TER!
Even though the AUM of passive funds has increased by 3868% in the last ten years!
Only 40% of AAUM is in direct plans (same duration and source as above).
Perhaps fund houses with largely unpopular active ELSS funds can try this stunt to get some AUM fillip. I don’t expect “big” AMCs with ELSS funds to close transactions and open a passive option. But then again, I could be wrong. Let us see how things pan out.
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