Bringing you live news and features since 2006 

India’s passive equity-linked savings schemes show potential – Cerulli Associates

RELATED TOPICS​

Recent regulatory developments allowing mutual fund companies to offer passive equity-linked schemes (ELSS) could provide opportunities to prospective market entrants as well as existing small and mid-sized firms, writes Cerulli Associates.

“India’s mutual fund industry is showing a greater take-up of passive investing. In 2022, ETFs and index funds led net flows, raking in INR832.4 billion (USD10.1 billion) and INR793.6 billion, respectively. Furthermore, regulatory initiatives on fees and increasing usage of online platforms have put passive investing in the spotlight.

“Since May 2022, the Securities and Exchange Board of India (SEBI) has allowed fund companies to launch passive ELSS in efforts to develop the passive fund industry. However, firms must choose between active or passive ELSS, thus limiting the product opportunity to only those that did not offer such products, or to new entrants. Between May and November 2022, only one firm—IIFL Mutual Fund—launched a passive ELSS. In the active ELSS space, there were two new launches in October and December,” Cerulli writes.

In January 2023, the SEBI relaxed norms further by allowing fund houses with existing active ELSS to launch passive ELSS provided they halt flows into their existing active ELSS, including flows coming through systematic investment plans. At the time of writing, Cerulli says that only one firm stopped fresh inflows to its actively managed ELSS and launched a passive ELSS on Feb. 14. 

The firm writes: “It remains to be seen how many more fund houses would consider halting their existing active ELSS to be eligible to launch passive ELSS, or if those with larger active ELSS would be keen to switch to low-cost ELSS options. Given the three-year lock-in period, fund managers can take efficient stock selection decisions to generate alpha compared to market-linked returns that index-tracking passive ELSS can offer to investors. Another point of consideration is the better fees earned in an actively managed ELSS than in a passive counterpart. The take-up of passive ELSS also depends upon investors’ reactions to the new income tax regime under the government’s union budget for 2023-2024.” 

In the initial years, Cerulli believes passive ELSS could offer prospective market entrants as well as existing small and mid-sized firms the opportunities to attract investors, due to low-cost nature of these products. The firm writes that as the SEBI continues with its efforts to drive down the fees of mutual fund products, industry dynamics could probably lead a few more fund houses to consider launching passive ELSS. As and when this happens, firms with more assets would be in a better position to ride out fee compression. 

“Passive ELSS is a significant development to look out for in terms of how the industry manages to cash in on this opportunity as the combination of low fees, tax incentives (depending upon investors’ decisions to choose between old and new tax regime), and stock market-linked return potential could help lure investors,” says Leena Dagade, associate director with Cerulli. “Young and first-time retail investors could make use of this mutual fund vehicle to embark on their investment journeys. However, more investor education would be needed to improve the take-up of these products.”

Latest News

ETF data consultant ETFGI reports that assets invested in the global ETF industry reached a new record of USD12.71 trillion..
Calastone has published an ETF white paper which examines several of the processes that take place across the lifecycle of..
Adapting product lines to fit into changing methodologies and meet shifting demand is essential to remaining relevant in the industry..
Investors urgently need greater access to diversified investment strategies aligned with the Paris Agreement on climate change if the world..

Related Articles

Taylor Krystkowiak, Themes ETFs
Themes ETFs opened its doors in December 2023, with an introductory suite of 11 ETFs – seven thematic and four...
Konrad Sippel, Solactive
At the end of March, financial index specialist, Solactive, published its 2024 annual report on future trends.  ...
Lorraine Sereyjol-Garros, BNP Paribas
Following changes to the French Monetary and Financial Code and of the French market authority AMF’s General Regulation, it is...
Ed Rosenberg, Texas Capital
Texas Capital Bank first opened its doors back in December 1998 and nowadays offers wealth-management services, as well as commercial,...
Subscribe to the ETF Express newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by