Fund review. IIFL ELSS Nifty 50: Should you invest in India’s first tax saver index fund?

Index mutual funds are cost-efficient and this is one of the main reasons for their attractiveness for investors. When an index fund comes with a tax saving option, it certainly attracts attention.

IIFL Mutual Fund has announced India’s first tax-saver index fund, ‘IIFL ELSS Nifty 50 Tax Saver Index Fund.’ The new fund offer (NFO) closes on December 21, 2022.

Beyond first of its kind, is there anything special in this large-cap fund? Let’s find out.

What is this fund?

IIFL ELSS Nifty 50 Tax Saver Index Fund will be an open-ended passive equity linked saving scheme with a statutory lock-in period of 3-years replicating/ tracking the Nifty 50 index.

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In a sea of actively-managed ELSS funds, this will be the first to track a set basket of stocks (Nifty 50).

Do note that current ELSS fund category has 70 per cent exposure to large-caps, 18 per cent to mid-caps, 9 per cent in small-caps and rest in cash, etc. In comparison, IIFL ELSS Nifty 50 Tax Saver Index Fund will be fully into large-caps.

Low cost potential

Being a passive fund (no reliance on fund manager for picking stocks), the scheme should have a relatively low cost as compared to actively managed schemes that tend to have a higher expense ratio.

For instance, existing ELSS funds bought by a distributor have an expense ratio ranging from 1.6 per cent to 2.6 per cent, while those bought directly have an expense ratio of 0.40 per cent to 1.80 per cent.

Compare this with existing Nifty index funds that cost between 0.27 per cent to 1.07 per cent via distributor mode. When bought directly, the same Nifty index funds cost between 0.06 per cent to 0.86 per cent.

Nifty 50 exposure, concerns

The current cumulative m-cap of Nifty 50 stocks is about half of that of all the listed stocks. Taking exposure to the Nifty companies through a passive fund gives them diversified exposure. But do remember that over 37 per cent of the fund will be allocated to a single sector: financial services, while IT (14.4 per cent), oil & gas (13 per cent), FMCG (8.6 per cent) are relatively smaller bets.

In terms of stocks, the top-10 holdings (as on November 30, 2022) are Reliance Industries (11.36 per cent), HDFC Bank (8.53 per cent), ICICI Bank (8.00 per cent), Infosys (7.21 per cent), Housing Development Finance Corporation (5.89 per cent), TCS (4.19 per cent), ITC (3.61 per cent), Kotak Mahindra Bank (3.45 per cent), L&T (3.02 per cent) and HUL (2.89 per cent).

It is no secret that Indian stock market has outperformed its peers in 2022 with a good margin.

In fact, benchmarks such as Nifty 50 are at their life-time highs on expectations of better earnings growth.

One must note that Nifty 50 valuations are also high compared to historical averages. Data suggest that whenever forward valuations (price to earnings) are high, returns in the following 12 months are modest.

Since IIFL ELSS Nifty 50 Tax Saver Index Fund comes with a 3-year lock-in, one must be prepared for a volatility in the coming 12-15 month period, which may ultimately smoothen out.

ELSS peers versus Nifty 50

The existing ELSS funds, which are actively managed, don’t have a great record in terms of beating their respective benchmarks (typically Nifty 500 or BSE 500 Total Return Index).

Over 1, 3, 5 and 10-year period, 20-50 per cent of ELSS funds have beaten their benchmark. In other words, the benchmark index has been doing better than actively-managed funds.

If Nifty 50 TRI is used as a benchmark, the record is slightly different. In 1 and 3-year period, 35 per cent and 51 per cent of ELSS funds beat benchmark. But in the 5-year period, this number drops to 10 per cent. In the 10-year period, nearly 66 per cent or 2/3rds of ELSS funds beat Nifty 50 TRI. This shows that, barring one phase, Nifty 500 or BSE 500 may be a better index to track.