SEBI may soon introduce Mutual Fund Lite for passive funds: What it means and how will investors benefit
The Securities and Exchange Board of India (SEBI) is close to rolling out a new set of regulations called “MF Lite” for passive funds. SEBI Chairperson Madhabi Puri Buch recently highlighted the regulator’s aim to support growth in the passive investment space.
The official decision may come in SEBI’s board meeting scheduled for September 30, 2024.
What is MF Lite?
MF Lite is a simplified framework for mutual funds that will manage only passive schemes, like index funds and exchange-traded funds (ETFs).
These funds track a market index or portfolio, making them lower in cost and management effort compared to actively managed funds.
Under MF Lite, fund houses that focus solely on passive schemes will operate with relaxed compliance requirements, reduced costs, and fewer regulatory burdens.
Who will benefit from MF Lite?
The relaxed entry norms will attract new participants to the mutual fund industry, especially smaller players who may have found existing regulations too demanding.
Current mutual fund companies can also benefit.
They can separate their passive fund operations into a new entity under the MF Lite framework.
This would allow them to focus on growing passive assets without the complexities of managing active funds.
For retail investors, MF Lite may lead to an increase in affordable passive investment options.
With simplified products, investors may be able to access low-cost funds that track both equity and debt markets.
SEBI’s relaxed framework
SEBI’s consultation paper in July 2024 proposed lowering the barriers for asset management companies (AMCs) offering passive funds.
Some key highlights of the proposed changes include:
- For sponsors, SEBI may reduce the net worth criteria from ₹50 crore to ₹35 crore. This makes it easier for new players to enter the market.
- The revenue from managing a passive fund of ₹10,000 crore is expected to be around ₹10 crore, suggesting that passive funds will need to scale up significantly to generate sustainable profits.
Hybrid passive funds and new schemes
Another part of MF Lite is the introduction of hybrid passive funds.
SEBI plans to allow these funds to invest in both equity and debt, offering investors a balanced approach. Three categories will be permitted initially:
- Debt-oriented (Equity: Debt – 25:75)
- Balanced (Equity: Debt – 50:50)
- Equity-oriented (Equity: Debt – 75:25)
With MF Lite, fund houses can reduce costs by focusing on passive schemes, which typically involve fewer resources to manage.