SEBI to Come Up with New ‘MF Lite’ Rules for Passive Funds: What Investors Should Know
The Securities and Exchange Board of India (SEBI) is now all set to introduce a set of “Mutual Fund Lite” rules, or MF Lite, for passive funds. According to SEBI, the main motive behind this step is to provide impetus to the growth of passive investments. The final decision on this matter may be taken at the next board meeting scheduled by SEBI for September 30, 2024.
What is MF Lite?
MF Lite will benefit mutual funds that are managing merely passive schemes like index funds and ETFs. These funds track a market index and thus cost lower and require less effort to be managed compared to the actively managed funds.
It would result in a reduced regime, minimum costs, and diminished regulatory burdens for companies specialized in passive funds so that it could be easy to operate for them.
Who will benefit from MF Lite?
The relaxed rules on MF Lite will make entry easier for new players, especially the smaller companies, into the mutual fund industry. Existing mutual fund companies could also benefit from it by launching a separate entity for passive fund operations under the MF Lite framework and therefore grow their passive assets without worrying about the active challenge of managing funds.
This will mean lower-priced passive funds for the individual investor. Since the products will be less complex, it is possible to have low-cost funds tracking both equity and debt markets.
SEBI Deregulates Fund Managers’ Rules
SEBI’s paper on July 2024 proposes that the entry be reduced from its current barriers for companies that manage passive funds. One big change is in reducing net worth required to sponsor from Rs 50 crore to Rs 35 crore so that the entry for new companies remains easier in the market. But making these funds profitable involves getting them to grow big-for this reason, because income from managing a Rs 10,000 crore passive fund is supposed to be only Rs 10 crore.
Hybrid passive funds and new types of funds
The MF Lite structure also opens doors to hybrid passive funds. These funds would invest in both equity as well as debt, thereby balancing the portfolio for the investor. SEBI would start with three categories:
- Debt-oriented (Equity: Debt – 25:75)
- Balanced (Equity: Debt – 50:50)
- Equity-oriented (Equity: Debt – 75:25)
These hybrid funds are supposed to provide low-cost diversified options for investors without compromising on the cost-cutting advantages of passive management.
MF Lite is an effort by SEBI to simplify the regulations for passive funds while reducing costs for fund managers and making schemes even more reasonably priced for regular investors. That should encourage more players to come into the mutual fund market and help grow options for passive investments.
