Should You Invest in India’s First Tax Saver Index Fund from IIFL?

Financial services company IIFL Holdings is coming up with India's first ever ELSS fund tracking the Nifty 50 index. Let's find out the details and what's in it for prospective investors.

Basic Details:

Investment Approach

• The IIFL ELSS Nifty 50 Tax Saver Index Fund is an open-ended passive equity linked savings scheme (ELSS) fund that will invest in the Nifty 50 index stocks in the same weightage as in the index, subject to the tracking error.
• The fund will have an allocation of 95% to 100% of its assets in equity and equity linked securities and 0% to 5% in debt and money market instruments.
• The fund will offer deduction under Section 80C of the Income Tax Act, 1961 and will distribute income periodically subject to a distributable surplus.

What is the Nifty 50 Index?

• Launched on April 22, 1996, Nifty 50 is a benchmark index which represents the largest 50 Indian companies listed on the National Stock Exchange in terms of market capitalization.
• The Nifty 50 Index covers 13 sectors comprising the Bank, IT, Pharmaceuticals, and Services sector among others. Financial services has the highest allocation in the index at 37.16%.
• The top 5 stocks constitute 40.99% of the overall Nifty weight and the top 10 stocks constitute 58.15% of the Nifty 50 weightage.

Performance of the Nifty 50

Nifty 50 has been a consistent wealth creator for investors over the years. Over the past 27 years, the index has clocked a CAGR return of 11% with an absolute return of 1700%. Notably, the index has clocked an average rolling return of 20.3%, 15.7%, and 14% for 1 year, 3 years, and 5 years, respectively.

Selection Criteria in Nifty 50

The list of Nifty 50 companies is not static throughout the year. It undergoes re-balancing semi-annually based on averages from the six months data. The data considered is as per the month ending January and July of every year. The companies are replaced on the last trading day of March, June, September and December. Market participants are given four weeks notice before they make any changes to the index. This ensures that the NIFTY 50 index removes stocks that would have fallen in market capitalization. This rebalancing and reconstruction process will automatically increase the exposure of Nifty 50 to emerging sectors. 

Top 10 Constituents of the Nifty 50:

(as of 05 Dec 2022)

Characteristics of the Fund:

• The fund is an ELSS fund with a lock-in period of three years. The NFO opened for subscription on December 01, 2022 and will close on December 21, 2022. Notably, the scheme will reopen for continuous sale and purchase on January 2, 2023. 
• The fund will be benchmarked against the Nifty 50 TRI Index and will be managed by Mr. Parijat Garg. 
• The fund will offer both Direct and Regular plans with an NAV of Rs 10/- per unit during the NFO period. The minimum subscription amount is Rs 500 and multiples thereafter. 

Advantages of the Fund

• Through this fund, investors will be able to invest in the top 50 companies of India in a passive manner which entails lesser risks. Moreover, investment in the fund will allow investors exposure to the most widely tracked index of India. 
• Moreover, passive funds have lower costs than actively managed funds. This will allow investors to save costs on their investments. 
• Lastly, investment in an ELSS fund will allow investors to avail tax benefits under Section 80C of the Income Tax Act, 1961. 

Disadvantages of the Fund

• Since this is an NFO, the fund does not have a performance history. As a result investors will be unable to compare the historical and relative performance of the fund with its peers. 
• Although a passive fund has lesser risks compared to an actively managed fund, the return potential of a passive fund is lower than a similar actively managed fund. As a result alpha generation capability is lower. 

Conclusion

Notwithstanding its lack of performance history, the fund can offer investors an exposure to the growing Nifty 50 companies with a lesser risk profile. Moreover, returns will be aided by the tax benefits under an ELSS fund. However, the lock-in period of three years can be a red flag for some investors.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.