Capital markets regulator Sebi has announced the introduction of the Mutual Funds Lite (MF Lite) framework to simplify compliance for entities aiming to launch passively managed mutual fund schemes. This initiative is aimed at encouraging new market entrants, driving innovation, and enhancing investment diversification within the mutual fund sector.
Highlights
Overview of the MF Lite Framework
The Securities and Exchange Board of India (Sebi) stated that the MF Lite framework will be applicable to various passive schemes, including:
- Index funds
- Exchange-traded funds (ETFs)
- Funds of funds (FoFs)
- Other strategies specified by the regulator
The main goals of this framework are to:
- Simplify processes for entities focusing on passive investment products
- Reduce entry barriers for new players
- Enhance market liquidity
Key Recommendations and Regulatory Changes
This framework is based on the suggestions made by a working group established by Sebi, which were subsequently approved by the Mutual Funds Advisory Committee. The mutual funds regulations of 1996 have been amended to include the MF Lite provisions, with implementation set for March 16, 2025.
Eligibility Criteria for Sponsors
The framework stipulates clear eligibility criteria for sponsors, such as:
- A minimum collective experience of 20 years for key personnel
- Allowing private equity funds to sponsor MF Lite entities under certain conditions
Simplified Compliance Requirements
Sebi’s new framework also aims to ease compliance demands in the following ways:
- Relaxed disclosure norms
- Optional reporting for trustees to lessen operational burdens
Initial Scope and Coverage
The MF Lite framework will initially include:
- Domestic equity indices with an asset under management (AUM) threshold of Rs 5,000 crore or more
- G-Sec-based debt funds
- Gold and silver ETFs
- Certain overseas ETFs
Existing mutual fund entities that manage both active and passive schemes will have the option to transfer their passive portfolios to a separate entity under this new framework.
New Documentation and Transparency Measures
Sebi’s circular also outlines the introduction of streamlined Scheme Information Documents (SIDs) for passive funds, alongside the facilitation of hybrid ETFs that blend equity and debt exposure.
The regulator has underlined the importance of transparency by mandating:
- Monthly portfolio disclosures for debt passive schemes
- Quarterly disclosures for equity passive schemes
The MF Lite framework seeks to enhance investor confidence through robust governance while providing flexibility to asset management companies.