Understanding New Mutual Fund Lite: New Framework for Passive Investments
SEBI released a new framework known as Mutual Fund (MF) Lite to transform the country’s investment landscape into passive investment. The new framework eases the process of setting up the framework for a passive mutual fund. Since it makes investing easier and less expensive, the investment in the mutual fund is accessible to investors.
Mutual fund lite is a regulatory framework put into place to better regulate the management of passive mutual funds in India. Its basic purpose is to open up entry barriers for newly incorporated firms that wish to enter the investment product service of mutual fund industries. It wants to ease out the operational requirements while attracting a larger audience through simpler products with minimum management fees.
This new structure brings in an easier way for index funds and ETFs to launch. Till now, mutual funds have had pretty stringent requirements for net worth, profitability, and track records in operational terms that were a barrier for entrance to the lesser or newly floated companies. Besides, the process of approval required a lot of documentation and time-consuming processes. This is where SEBI comes up with Mutual Fund Lite, which relaxes all these conditions and ensures competition as well as a variety of passive investment products can reach the investor’s share market.
Important Features of Mutual Fund Lite
1. Easier Entry for New Players: One of the most important features of Mutual Fund Lite is that its entry barriers for new firms are easier. The relaxed rules mean that more companies can offer passively managed mutual funds without necessarily requiring vast resources or prior market experience.
2. Simplified Role for Trustees: SEBI has eased the rules on trustees, which further reduces compliance costs and makes a straightforward pathway for companies to monitor their passive schemes.
3. Faster Process of Launching New Mutual Funds: The entire process of seeking approval for the launch of the new mutual fund was long-winded and clumsy because of documentation requirements under the old guidelines. Under MF Lite, the process has become relatively simpler and easier. This makes asset management companies launch new products in the market faster and more efficiently.
Difference Between Mutual Fund Lite and Traditional Mutual Funds
On the other hand, traditional mutual funds, mainly actively managed ones, consist of a fund manager that tries to outperform the market by focusing on certain stocks or bonds it expects to deliver performance. This process involves higher costs because of continuous monitoring of the market research and required adjustments of the portfolio. Mutual Fund Lite, by contrast, sticks to a passive investment strategy and emphasizes simplification along with efficiency when it comes to cost.
Some Differences between Mutual Fund Lite and others
1. Traditional mutual funds pay higher fees to account for management costs. Mutual Fund Lite, instead, offers low-cost passive schemes with significantly lower fees.
2. Traditional mutual funds have stringent regulatory requirements and paper which will delay the approval process. Under Mutual Fund Lite, the regulatory requirements are relaxed which means quicker and easier launches of funds.
3. Mutual Fund Lite would be suitable to use for a new investor, especially a novice and a person with not enough time to monitor every change in the market. However, he or she wants to have a share of the increase in the value of the market.
Advantages of Investing in Mutual Fund Lite
1. Cost Efficiency: Since it is passively managed, the operating cost is much cheaper than an actively managed fund. Thus, this points to a lesser expense ratio for the investor.
2. Transparency: In the context of MF Lite funds, investors can identify easily the allocation and fund performance. There is no scope for hidden strategies, and predictability in terms of tracking the index makes things clearer with control.
3. Less Knowledge Required: Passive investment requires much less and even sometimes no market knowledge at all. This type of investment does not require an investor to pick a specific stock or be concerned with the timing of the market, which makes it a “set and forget” strategy very appropriate for busy professionals or new beginners.
Options for Asset Management Companies
Under Mutual Fund Lite, there are two options available for the AMCs. They can either separate their passive schemes into a new entity that will now comply with regulations under MF Lite, or they can continue managing their passive offerings in the present structure while taking the benefit of more relaxed rules. This really gives the flexibility to manage money to the AMCs in the most appropriate manner, keeping in line with SEBI’s updated guidelines.
How to Invest in Mutual Fund Lite?
If a person wanted to invest in MF Lite, they would need to open an investment account with a mutual fund company or broker. Once the account is set up, they may research the list of passive funds available under the MF Lite category. Here’s the step-by-step investing:
1. Study Passive Funds: Investment in funds tracking the main benchmark like Nifty 50 or Sensex. Therefore, such funds should align with a person’s goals and risk appetite.
2. Expense Ratio: The very idea of MF Lite is expense efficiency. Here also, expense ratios have to be compared for various funds to find the least cost-intensive options available.
3. Invest and Stay the Course: The MF Lite is a long-term growth fund. Since these funds are tracking the overall market, short-term decisions based on changes in the market are not advisable. The approach should be one of consistent investing and patient waiting.
4. Occasional Monitoring: The passive investing strategy doesn’t require frequent reviewing of the portfolio. However, it is advisable to review the portfolio at least annually or as a response to significant market events.
Conclusion
One great step in improving passive investment in India is Mutual Fund Lite. Regulations with SEBI simplify the barriers for new entrants to induce greater competition and enhance more choices with reduced costs to the investors. As this framework dawns, the threat as well as opportunity knocks for the investors and the asset management companies alike.
