Securities market regulator, SEBI on May 23 came up with a circular on ‘Development of Passive Funds’ covering issues related to ETFs (Exchange Traded Funds) and Index Funds. Notably, the circular has introduced a new category of mutual fund schemes – Passive ELSS (Equity Linked Savings Scheme).
Passive ELSS
As per the latest circular, the passive ELSS scheme will be based on an index of equity shares of the top 250 companies in terms of market capitalisation. The last time SEBI did a major overhaul of mutual schemes was in October 2017, under which the regulator had standardized scheme categories and characteristics of each category as a measure of uniformity and standardization across the mutual fund space. Based on this circular, ELSS was a category of schemes under ‘Equity Schemes’. After the latest change, which comes into effect from July 1, it will be called ‘Active ELSS Scheme’.
In addition, a ‘Passive ELSS Scheme’ will be launched under the heading ‘Other Schemes’. However, a mutual fund AMC can launch only one of the two and not both. ELSS schemes are open-ended equity-linked schemes with a lock-in of 3 years and avail tax benefits under Section 80C of the Income Tax Act. It allows an individual to deduct tax up to Rs. 1.5 lakhs every financial year for investments made in the scheme, avenues of other eligible investments covered under section.
more clarity
In order to serve the purpose of greater clarity to investors, the circular also specifies that the nomenclature of the ETF/Index Fund should include the name of the underlying index or the commodity they track. Also, once an ETF is listed on the exchanges, the scrip code of such ETF must be disclosed in the nomenclature at all places.
Criteria for Debt ETFs
In a number of parameters specified, the AMC is tasked with ensuring that in the case of debt ETFs/index funds, the index for a particular group (excluding PSUs, securities issued by public financial institutions) does not exceed 25%. There should not be much load. PFIs) and Public Sector Banks (PSBs). Also, the index should not have more than 25% weighting for a particular sector (public securities, T-bills, SDLs and AAA-rated securities issued by PSUs, PFIs and PSBs) excluding those. However, thematic or regional indices are excluded from this provision. Implementation of these provisions should help in reducing the concentration risk in debt ETFs/index funds.