Sebi Introduces MF Lite Framework to Simplify Passive Mutual Fund Investing

The Securities and Exchange Board of India (Sebi) has introduced a simplified regulatory framework to make passive mutual fund investing easier. Named the Mutual Funds Lite (MF Lite) framework, this new regulation is designed to reduce compliance burdens on entities that exclusively launch passive mutual fund schemes. According to a Business Standard report, this move is expected to lower entry barriers and encourage new market players to participate in India's growing mutual fund industry.

What is the Difference Between Passive and Active Funds?

Passive mutual funds are designed to replicate exchange-traded funds (ETFs) and index funds, whose portfolios are created based on a specific index, making them easier to track. On the other hand, active mutual funds require expert fund managers who actively monitor the portfolio, making decisions on investments in specific securities based on market research and strategies.

The mutual fund industry's assets under management (AUM) have seen remarkable growth, increasing over seven times from ₹8.3 lakh crore in December 2013 to ₹61.2 lakh crore in June 2024. Of this, passive mutual funds now account for ₹10.2 lakh crore with a 17% market share, while active funds have an AUM of ₹50.9 lakh crore as of June 2024.

Key Changes in the New Passive Mutual Fund Rules

Securities and Exchange Board of India Sebi's MF Lite framework introduces several significant changes aimed at streamlining the regulatory environment for passive mutual funds. These include:

1. Relaxed Eligibility Criteria: The new rules will be less stringent regarding the sponsor’s net worth, profitability, and track record, making it easier for new players to enter the market.

2. Simplified Approval Process: Launching passive mutual fund schemes will now involve a streamlined approval process, which will help reduce delays and regulatory hurdles.

3. Reduced Disclosure Requirements: Under MF Lite, compliance requirements will be eased, reducing the regulatory burden on mutual fund houses.

How Do the New Rules Differ from the Old Framework?

Previously, the regulatory framework for passive mutual funds was uniformly applicable to all mutual fund schemes, which often placed passive funds at a disadvantage. The new MF Lite framework recognizes the unique needs of passive investment schemes and reduces the regulatory burden, helping passive mutual fund schemes thrive in a more tailored environment.

Objectives of the New Mutual Fund Framework

The MF Lite framework has been introduced with several objectives to further enhance the mutual fund ecosystem:

• Ease of Entry: By lowering entry barriers, the MF Lite framework encourages more players to launch passive mutual funds, increasing competition and options for investors.

• Increased Market Penetration: Reducing regulatory hurdles can boost market penetration, making passive investment schemes more accessible to a broader audience.

• Enhanced Liquidity: With more players in the market, liquidity will increase, fostering a more dynamic investment landscape.

• Investment Diversification: Investors will now have access to a wider range of passive investment options, allowing for better diversification of their portfolios.

• Innovation: The relaxed regulations encourage the development of innovative passive fund products, contributing to the overall evolution of the mutual fund market.

Key Provisions of the MF Lite Framework

• Separate Entity Option: Asset management companies (AMCs) that offer both active and passive schemes can now segregate their passive schemes into a separate entity to simplify management.

• Relaxed Requirements: The regulatory requirements for passive schemes under MF Lite will be less stringent, particularly concerning disclosures and other compliance obligations.

What About Existing AMCs Offering Both Passive and Active Schemes?

Existing AMCs that offer both active and passive mutual fund schemes will have the option to separate their passive schemes into a different entity. Even if they do not choose to do so, the new framework will still apply to their passive funds, streamlining compliance and operational processes.

Conclusion

The introduction of Sebi's MF Lite framework marks a significant shift in the regulation of India's mutual fund industry. By lowering entry barriers and simplifying compliance, this framework is set to foster greater competition, innovation, and liquidity in the passive mutual fund space. It provides a more conducive environment for new market players and offers investors more diversified and accessible passive investment options.