On December 31, 2024, the Securities and Exchange Board of India (SEBI) introduced a transformative initiative aimed at promoting passive investment in the Indian mutual fund sector. The new “Mutual Funds Lite” (MF Lite) framework has been designed to cater specifically to passively managed mutual fund schemes, providing a relaxed and simplified regulatory framework compared to traditional actively managed funds. This move is part of SEBI’s broader strategy to encourage more players in the market, foster investment diversification, and enhance market liquidity.
The Need for MF Lite
Traditionally, the regulatory framework for mutual funds in India has applied uniformly to both active and passive schemes. However, the operational dynamics of these two types of funds differ significantly. Passive funds, which track indices and do not require active stock selection or management, often face the same stringent compliance requirements that are tailored for actively managed funds. These requirements, such as net worth criteria, track record, and profitability standards, may not be necessary for passive funds, which tend to have lower operational costs and require fewer resources.
The MF Lite framework aims to relax some of these requirements to ease the entry barriers for asset management companies (AMCs) interested in launching passive funds. By doing so, SEBI hopes to lower compliance costs, encourage new players, and ultimately expand the reach of passive investment options to a wider audience.
Categories of Passive Schemes Under the MF Lite Framework
The MF Lite framework will be applicable to a select range of passive mutual fund schemes, primarily those based on equity indices, debt indices, gold and silver ETFs, and certain overseas ETFs. The primary focus will be on schemes that track broad-based indices or established benchmarks, ensuring that the passive funds remain diversified and credible.
The first phase of implementation of the MF Lite framework will cover the following categories of schemes:
- Equity Passive Schemes: These are funds that track domestic equity indices, including broad-based indices or benchmarks used by actively managed funds.
- Debt Passive Schemes: This includes funds based on government securities (G-Secs), treasury bills (T-bills), state development loans (SDLs), or domestic constant-duration passive debt funds.
- Gold and Silver ETFs: These exchange-traded funds invest in gold or silver, offering an easy and liquid way to gain exposure to the commodities.
- Overseas ETFs and Funds of Funds (FoFs): These are funds investing in foreign ETFs or funds that track single overseas passive indices.
Additionally, the framework outlines certain quantitative thresholds for these funds, such as a minimum collective Assets Under Management (AUM) of INR 5,000 Crore for domestic equity or debt passive funds. Similarly, overseas equity passive indices must have an AUM of at least $20 billion to qualify under the MF Lite framework.
Relaxed Requirements for Sponsors
Under the MF Lite framework, there are relaxed eligibility criteria for sponsors wishing to launch passive mutual fund schemes. Typically, sponsors are required to meet a high level of experience and track record, but for MF Lite schemes, the requirements are less stringent. Notably, asset management companies (AMCs) can appoint a Chief Risk Officer (CRO) voluntarily, with the Chief Compliance Officer (CCO) also eligible to take on the CRO role if qualified.
Private equity (PE) funds are allowed to sponsor MF Lite schemes, provided they meet certain conditions. These include having at least five years of experience in the investment management sector and managing a committed capital of at least INR 2,500 Crore.
Benefits of MF Lite
The introduction of the MF Lite framework is expected to bring several key benefits to the Indian investment landscape:
- Ease of Entry: By lowering compliance barriers, SEBI hopes to encourage new players to enter the market, fostering greater competition.
- Cost Efficiency: With fewer regulatory burdens, passive funds can operate at lower costs, benefiting both fund managers and investors.
- Increased Diversification: MF Lite will increase the range of investment options available to investors, particularly in niche markets like gold and international indices.
- Enhanced Liquidity: More passive funds in the market will contribute to improved liquidity, as they typically offer transparent, low-cost investment solutions that attract a broad range of investors.
Conclusion
SEBI’s introduction of the MF Lite framework marks a significant step toward modernizing the Indian mutual fund industry and increasing the accessibility of passive investment options. By providing a simplified regulatory regime for passive mutual funds, SEBI aims to enhance the depth and diversity of the Indian capital markets while fostering innovation and promoting greater investor participation. As the MF Lite framework rolls out in 2025, it will be interesting to see how it shapes the future of passive investment in India.
