SEBI Introduces MF Lite Framework to Simplify Compliance for Passive Mutual Funds
The Securities and Exchange Board of India (SEBI) has unveiled the Mutual Funds Lite (MF Lite) framework, aimed at simplifying the compliance process for entities launching passively managed mutual fund schemes. The new framework seeks to encourage innovation, promote new entrants, and foster investment diversification within the mutual fund industry.
The launch of the MF Lite framework by SEBI aims at streamlining procedures for passive investment products such as index funds, exchange-traded funds (ETFs), and funds of funds (FoFs) along with other products envisaged by the regulator. It is expected that this initiative shall reduce barriers of entry for the new players while increasing liquidity within the sector.
Essential Features of the MF Lite Framework
- Application: The MF Lite framework would particularly apply to the passive mutual fund schemes which would cover schemes based on the equity indices, G-Sec-based debt funds, gold and silver ETFs and some overseas ETFs. -It would reduce operational burdens through easement of disclosure norms and would provide optional reporting for trustees.
- Eligibility for Sponsors: The framework requires that key personnel of a sponsor must have at least 20 years of cumulative experience. It also enables private equity funds to sponsor MF Lite entities in certain circumstances.
- AUM Threshold: The framework will apply only to schemes having an AUM of Rs 5,000 crore or more initially.
Mutual Funds Regulation Amendments
The Mutual Funds Regulations 1996 is being amended to absorb the provisions of MF Lite. The date of effect for the amendments has been prescribed to be March 16, 2025. The changes come in after subsequent endorsements made by Mutual Funds Advisory Committee on the SEBI constituted working group recommendations.
For mutual funds managing both active and passive schemes, SEBI’s circular introduces the option to migrate their passive portfolios to separate entities under the new MF Lite framework. This provides flexibility for existing mutual funds to adjust their structures in line with the new compliance norms.
Transparency and Governance
The MF Lite framework aims to ensure robust governance while allowing asset management companies more flexibility. It also focuses on transparency by mandating monthly portfolio disclosures for debt passive schemes and quarterly disclosures for equity passive schemes.
For one, SEBI’s circular provides for simplified Scheme Information Documents (SIDs) for passive funds and allows for hybrid ETFs which combine equity as well as debt exposure, making the options list even more voluminous for the investor.
SEBI expects to be able to lift investor confidence as it brings into the system an MF Lite framework, simplifying the process for passive mutual funds. With lower compliance burden and higher innovation, the authority wants new players in this market and thus increase liquidity levels in the markets. Eventually, it should build a more powerful passive investment ecosystem in India. It’s yet another step that helps the passive investment product space get easy and comfortable management for asset managers and investors.
