IIFL launched India’s first tax-saver index fund. IIFL ELSS Nifty 50 Tax Saver Index Fund is an Index Fund that tracks the Nifty 50 as its Index. The NFO is open from 1st December 2022 to 21st December 2022. Should you invest as its low-cost passive fund compared to active ELSS Funds?
We all know that Index Funds or Passive Funds are gaining popularity. IIFL launched this ELSS Nifty 50 Tax Saver Index Fund to utilize this popularity.
IIFL ELSS Nifty 50 Tax Saver Index Fund – Should you invest?
Try to read the points below before jumping to the conclusion that one must invest in this index fund which is low-cost in nature.
# Do you NEED an ELSS Fund for tax savings?
The first question you have to ask yourself is whether you really need it or not. Filling the Sec.80C limit nowadays is not so difficult. Just because the low-cost ELSS index fund is available does not mean you have to jump in.
The list of options available to fill the Sec.80C gap is EPF, PPF, SSY, Term Life Insurance Premium, tuition fee of children or your home loan principal. If you are unable to fulfill the gap with these products, then you have to look to ELSS.
NEVER INVEST IN ELSS FUNDS JUST BECAUSE THIS IS THE ONLY ONE CATEGORY UNDER SEC.80 WHERE THE LOCK-IN IS 3 YEARS.
Equity investment should be for your long-term goals but not for a 3-year time horizon. Again, when you are investing, the steps to be followed are as below.
- Identify financial goals
- Identify the time horizon of goals
- Identify the amount required
- Do the asset allocation (like debt to equity) based on your risk appetite and time horizon
- Finally when you have to choose the products within the asset classes, look for the products which may also help you to save the tax.
However, in many cases, people do the reverse. Their priority is to save the tax with the least lock-in product. For such investors, obliviously ELSS is a kind of panacea. I am not saying that one must not give importance to tax saving. However, the process many follow is wrong.
# Index Funds are not for ALL!!
Yes, just because many are investing in Index Funds does not mean that you too jump there. Index Fund investing requires a lot of maturity, patience, and sticking to your own strategy. Because if you check active vs passive funds, there are always a few funds that may be outperforming the index. However, how consistently they outperform is the question mark.
Adopting Index Funds requires that maturity to stick to what you adopted. Many preach that Index Funds are for beginners. However, I always say that they are for mature investors.
Few investors may adopt this strategy. However, their fickle mind when they look for few funds which are outperforming may vanish their conviction towards index funds. If you are one among them, then better to stay away from either this product or any of the index funds.
# Performance of the Fund
Just because it is an Index Fund does not mean it will surely generate an index return. There is something called tracking error and tracking difference. You have to understand this concept before you choose the Index Funds. I have written a detailed post on this “Tracking Difference Vs Tracking Error of ETF and Index Funds”.
These two indicators will give what the fund’s performance is like in terms of consistency and volatility. Unfortunately IIFL ELSS Nifty 50 Tax Saver Index Fund is an NFO, and this data is currently not available.
# Game of expense ratio
There is nowhere written that the current expenses will remain the same throughout your investment journey for the funds. The only regulation with respect to expense ratio is the AUM slab-based expense ratio. Take for example, equity funds, if the fund AUM is below Rs.500 Cr, then AMC may charge you UP TO 2.25%. Same way, if the fund AUM is above Rs.50,000 Cr, then AMC may charge you UP TO 1.05%.
It means to take for example a fund whose AUM is around Rs.400 Cr, then the AMC may charge 0.1% or up to 2.25%. Again, such an expense ratio will not remain constant. They may charge you less initially and later on they may increase within the mandated bandwidth.
Hence, if a fund is offering you an index fund at the lowest cost, then don’t be under a misconception that it will remain the same throughout your investment period. For various reasons (they no need to justify), they may in the future increase the expense ratio within the bandwidth based on AUM.
Unfortunately this data is currently not available for this fund as it is an NFO. hence, better wait to watch than blindly jump.
# AUM also matters
Yes, in Index Funds AUM also matters. Usually, low AUM means higher tracking errors. Also, as I mentioned above, the TER is based on the AUM, which may result in high costs (if you opted for the low AUM fund).
Conclusion – Just because it is a first ELSS Index Fund does not mean you jump and invest immediately. Wait for the fund to accumulate a decent AUM and also let us see how the performance of the fund (by looking at its tracking error and tracking difference), then take a call. If you are fond of Index Funds, then there are various low-cost Index Funds with decent AUM and with low tracking errors already available in the market (not ELSS). You can choose them.
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