Author: Sayali Kshirsagar, fourth year student at Vivekanand Education Society’s College of Law, Mumbai
Keywords: SEBI, Mutual Fund Lite, Passively Managed Funds
On December 31, 2024, the Securities and Exchange Board of India (‘SEBI’) issued a circular introducing framework of Mutual Fund Lite (‘MF Lite’) for passively managed schemes of Mutual Fund (‘Framework’) which aim to overcome the difficulties. The Mutual Fund (‘MF’) industry in India has witnessed remarkable growth over the years. By introducing this MF Lite framework, the regulatory body aims to simplify investing especially in the passive investment funds by lowering the compliance requirement and encouraging more market participant.
Understanding Mutual Funds
Mutuals funds is a collective investment vehicle which collects and pools money from various investor to invest into different portfolio such as equity, debt, funds of fund, exchange traded fund etc. This investment is done by professional fund manager, who is responsible for all the actions taken for investment. There are two types of schemes in the MF, those are active schemes & passive schemes. The actively managed funds are those which outperform the market and as the name says it requires active involvement. The passively managed funds are those which replicate a specific market index such as NIFTY 50. They do not require much involvement. Currently both the active and passive funds are governed by the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (‘MF Regulations’).
Exchange-traded funds (‘ETFs’) and index funds are examples of passive funds that have become more well-liked because of their transparency and affordability. However, sponsors and asset management companies (‘AMCs’) have faced difficulties because the regulatory framework for passive funds has so far been the same as that for active funds. However, the circular aims to overcome the difficulties. The provisions of this circular shall come into effect from March 16, 2025.
Background
On December 16, 2024, SEBI notified the Securities and Exchange Board of India (Mutual Funds) (Third Amendment) Regulations, 2024 (the ‘Amended MF Regulations’) wherein Chapter XI- MF Lite (‘Chapter XI’) provides regulations exclusively for passively managed funds. This is followed by a consultation paper issued by SEBI on July 01, 2024, introducing the MF Lite regulations for passively managed funds with objective of reducing the compliance requirement, foster innovation, encourage competition and promote ease of entry for the MFs interested in launching only passive schemes. Thereafter the same was placed before the SEBI’s board meeting dated September 30, 2024. The board considered and approved to amend the current MF Regulations to introduce the new MF Funds lite framework.
Understanding the key features of framework
The framework defines MF lite as a MF which has obtained registration under the Chapter XI and covers only of passive scheme types. They include target maturity debt passive funds based on government securities and treasury bills, gold and silver exchange-traded funds (‘ETFs’) and their Fund of Funds (‘FoFs’), certain overseas ETFs and FoFs, and domestic equity passive funds that track broad indices with Assets Under Management (‘AUM’) exceeding ₹5,000 crore. In order to maintain regulatory control, the framework compasses the most significant aspects of the passive investing industry through careful selection of qualified schemes.
The MF Lite Framework provides a systematic approach to lowering entry barriers in the market for passive fund management while maintaining stringent fund management regulations. Unlike traditional mutual funds, sponsor eligibility is now simpler due to SEBI’s relaxation of its net worth limitations. Private equity companies that meet specific criteria, such having at least five years of experience and a committed capital of ₹2,500 crore, are able to sponsor MF Lite schemes. Additionally, the streamlined compliance system ensures that fund administration quality is upheld by requiring Key Managerial Personnel to have a minimum of 20 years of combined expertise.
The framework’s operational flexibility is another fundamental feature. To improve the compliance, the SEBI has implemented a number of initiatives, such as requiring Scheme Information papers (‘SIDs’) to be fast-tracked, doing away with the need for separate Key Information Memorandums (‘KIMs’), and moving from semi-annual to yearly updates for scheme papers. The reduction of allocation requirements for investor education and the simplification of portfolio disclosure regulations shall result in lower operational expense.
Hybrid ETFs, which provide a whole new class of passive investment products, is one of the framework’s most inventive features. Three types of hybrid funds will be available namely debt-oriented funds consisting 65–80% debt allocation, equity-oriented funds consisting 65–80% equity exposure, and balanced funds consisting 40–60% equity and debt allocation. This addition to the passive fund ecosystem allows investors to access a wider range of investment options through a single product.
The framework retains a strong focus on risk management through specific investment limitations, while simultaneously encouraging innovation and simplicity of use. The MF Lite framework restricts passive schemes to investing in plain vanilla securities and forbids them from short selling, inter-scheme transactions, and investments in sophisticated products or unlisted debt instruments. These limitations aid in preventing investor protection from being sacrificed in favor of a more simplified regulatory framework.
Impact on the MF industry
This approach has broad impact for everyone involved in the MF sector. It offers investors more options for passive investments, maybe less expensive because of fewer operating expenses, and simpler and more transparent scheme documentation. AUM benefit from lower compliance, easier access to the passive fund management market, and the ability to separate their active and passive operations or convert current ones to the MF Lite framework.
The framework is expected to encourage greater competition and innovation in passive products for the industry as a whole. Through more passive investments, the specialization in passive fund management that this framework promotes may improve market efficiency.
Concluding Remarks
This new MF Lite framework introduced by is a progressive moment in the evolution of India’s MF landscape which reflects India’s readiness to adapt financial opportunities by changing times. One of the standout aspects of the framework is simplifying the entry barriers and disclosure requirements which shall allow more market participants in diverse range. While the introduction of hybrid ETFs and the relaxation of sponsor eligibility criteria signal SEBI’s intent to create a dynamic marketplace that caters to evolving investor needs. These introduction and changes are not just regulatory adjustments but represent inclusiveness where both retail and institutional investor to gain benefit of the passive investment option.
Nevertheless the framework is generally instrumental in shaping the future of passive investment in India by its ability to promote financial inclusion, lower operational costs and boosting the market but the ultimate success will depend on the collective efforts of the industry overall to align the innovation with responsibility and, lastly ensuring a balance between growth and investor security.
