Understanding SEBI Rules on Passive Funds The Securities and | Indian Economy -Civil Service Gurukul

Understanding SEBI Rules on Passive Funds

The Securities and Exchange Board of India (SEBI) recently issued a circular on passive funds covering matters related to transparency, liquidity and operational aspects of exchange-traded funds (ETFs) and index funds.

What are Passive Funds?

A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in.

Unlike with an active fund, the fund manager does not decide what securities the fund takes on.

This normally makes passive funds cheaper to invest in than active funds, which require the fund manager to spend time researching and analysing opportunities to invest in.

Tracker funds, such as ETFs (exchange traded funds) and index funds fall under the banner of passive funds.

What is a passive ELSS scheme?

Passive funds mimic an underlying index. By contrast active funds are actively managed by fund managers.

The SEBI has now introduced a passive equity-linked saving schemes (ELSS) category, which will give taxpayers another investment option to avail of tax benefits.

According to the circular, the passive ELSS scheme will be based on any index comprising equity shares from the top 250 companies in terms of market capitalization.

Beginning 1 July, a fund house will be able to either have an active ELSS scheme or a passive ELSS scheme, but not both.