TLDR: The Indian mutual fund (MF) industry has always been a cornerstone of wealth creation for millions. Over the years, it has evolved to offer diverse investment products, ranging from actively managed funds to passive schemes like Exchange Traded Funds (ETFs) and Index Funds. However, the regulatory landscape has largely remained uniform, with both active and passive schemes governed by the same framework. This uniformity, while ensuring robust compliance, has often created unnecessary hurdles for passive funds, which inherently carry lesser risks compared to their active counterparts.

To address this, the Securities and Exchange Board of India (SEBI) has introduced the MF Lite framework, a significant amendment to the existing SEBI (Mutual Funds) Regulations, 1996. This framework is tailored exclusively for passively managed schemes, bringing about much-needed regulatory relaxation, fostering innovation, and encouraging new players to enter the market.

 

Why MF Lite?

As of August 31, 2024, passive schemes—comprising ETFs and Index Funds—account for 16.4% of the mutual fund industry's total assets under management (AUM), amounting to INR 10.95 lakh crore. This growing significance of passive funds necessitates a specialized framework that can:

  1. Promote Ease of Entry: Simplify the process for new entrants in the MF space who wish to focus exclusively on passive schemes.

  2. Encourage Innovation: Foster the creation of diverse and innovative passive investment products.

  3. Reduce Compliance Burden: Streamline regulatory requirements to reflect the lower risks associated with passive funds.

  4. Enhance Market Liquidity: Increase participation in the passive fund segment, thereby improving overall market liquidity.

 

Key Features of MF Lite

The MF Lite framework introduces several groundbreaking changes to the regulatory landscape for passive schemes. Here are its most notable features:

1. Relaxed Entry Criteria for Sponsors

The framework offers a more lenient eligibility criterion for sponsors wishing to operate under the MF Lite framework. For example:

  • Minimum net worth requirements are relaxed compared to those for active schemes.

  • AMCs managing passive funds exclusively under MF Lite can appoint a Chief Compliance Officer (CCO) as their Chief Risk Officer (CRO) on a voluntary basis.

  • Sponsors are allowed to operate under a lighter regulatory regime until their AUM exceeds INR 1 lakh crore, after which stricter norms apply.

2. Simplified Roles for Trustees

The roles and responsibilities of trustees under MF Lite are significantly reduced, focusing only on:

  • Ensuring compliance with key regulatory requirements.

  • Addressing issues like related party transactions, conflicts of interest, and mis-selling.

3. Lighter Compliance Obligations

To reflect the lower complexity and risk of passive schemes, MF Lite introduces several compliance relaxations:

  • Scheme Information Document (SID): A simplified SID format is mandated, which removes irrelevant details and includes parameters crucial to passive schemes, such as tracking error and tracking difference.

  • Reporting Requirements: Periodic updates, such as portfolio disclosures, have reduced frequency—monthly for debt-oriented schemes and quarterly for equity-oriented schemes.

  • Trustee Reports: The requirement to submit trustee reports to SEBI is replaced by an annual AMC report.

4. Investor Education and Awareness

AMCs managing passive schemes are required to allocate a small portion of their Total Expense Ratio (TER) for investor education and awareness campaigns. Out of this, a minimum of 5% must be directed specifically toward promoting passive funds.

5. Enhanced Focus on Passive Schemes

The framework allows AMCs to manage only passive schemes or hive off their passive portfolios into separate entities under the MF Lite regime. This ensures a level playing field for all players while promoting the growth of the passive segment.

 

Why MF Lite Matters

For Investors:

MF Lite brings numerous benefits to investors:

  • Cost Efficiency: Passive schemes generally have lower TERs, and the reduced compliance burden under MF Lite could lead to further cost reductions.

  • Transparency: Simplified documentation and clearer disclosures make it easier for investors to understand and evaluate their investments.

  • Accessibility: By encouraging new entrants, MF Lite expands the range of passive investment options available to investors.

For AMCs:

The framework creates opportunities for innovation and growth:

  • Lower Operational Costs: Relaxed compliance norms reduce the administrative and operational burden.

  • Ease of Expansion: New players can enter the market with reduced financial and regulatory hurdles.

  • Focused Management: AMCs can now specialize in passive fund management, fostering expertise and innovation in this space.

 

Challenges Ahead

While the MF Lite framework is a significant step forward, it does come with its share of challenges:

  1. Investor Awareness: Despite the growing popularity of passive funds, many investors remain unaware of their benefits. Targeted awareness campaigns will be crucial.

  2. Governance Risks: With relaxed roles for trustees, ensuring robust governance and conflict-of-interest management will be essential.

  3. Industry Adaptation: Existing players may need to adjust their strategies to align with the new framework, especially those managing both active and passive schemes.

 

The Road Ahead

The MF Lite framework is poised to transform India’s mutual fund landscape by making passive investments more accessible, affordable, and appealing. Its introduction reflects SEBI’s commitment to fostering innovation and competition while ensuring investor protection.

For investors and fund managers alike, MF Lite represents a new era of opportunities. Whether you’re looking to explore the benefits of passive schemes or plan to enter the mutual fund space, now is the time to act.


Want to learn more about how MF Lite can work for you? Call +91 9999 139 391 or WhatsApp for a free consultation. Let’s navigate this exciting transformation together!