Introduction of MF Lite (Mutual Funds Lite) for passively managed mutual funds

Introduction

In a circular dated 31st December, 2024 the Securities and Exchange Board of India has introduced a framework named “Mutual Funds Lite (“MF Lite”)” [1]which is targeted only towards a segment of passive mutual funds in order to promote ease of entry, encourage the new entrants into the industry, reduce requirements for compliance, increase market penetration, facilitate investments and its diversifications including liquidity and foster growth and innovation.

Mutual Funds Lite refers to a simplified and alternate version of traditional mutual funds which is designed to streamline the investments in regard to passive schemes including index funds and exchange-traded funds. The present-day regulatory framework, however, does not distinguish in terms of entry barriers and applies equally to the active and passive mutual fund schemes.

Reasons for Regulating Mutual Funds Lite

Concerning the present market situation regarding mutual funds, it was necessary to address the irrelevant aspects of the existing laws and requirements that did not address the passive funds and create an increasingly relaxed framework including lighter provisions i.e., the MF Lite which is targeted specifically to the “Passive Mutual Funds Schemes”. This scheme also aims and promotes easier access to the market by encouraging new entrants, reducing compliance burdens, expanding the market reach and liquidity including investment diversification.

In the initial phase of integrating the MF Lite Framework, only passive funds that have already been linked to domestic equity passive indices include a total asset under management (“AUM”) of Rs. 5,000 crores or more as of 31st December of each particular year shall be included. The framework shall streamline the requirements for compliance and reduce operational burdens leading to cost saving and decreased hurdles. [2]

In order to become eligible for sponsorship of MF Lite Funds, the firms must have atleast 20 years of combined experience in key roles and private equity firms may also sponsor MF Lite Entities under any specific circumstances.

Who can benefit from MF Lite

The objective of MF Lite is to provide an increased cost-effective choice for retail investors by offering passive investment strategies which shall track equity and debt markets. The eased compliance requirements shall make it easier for the new entrants, specifically the smaller mutual funds companies, to introduce their schemes into the market without facing the complications of active funds management.

Existing mutual funds’ portfolios which can handle both active and passive schemes would now be able to differentiate their passive portfolios into a separate entity within the framework of MF Lite which shall also enable them to concentrate upon expansion of their passive assets completely. Moreover, hybrid passive funds have also been introduced which lie into three categories – balanced, equity and debt oriented. However, in order to launch one separate mutual fund for each category, a minimum subscription amount shall be Rs. 10 Crores.

This scheme would have multiple benefits including better portfolio management for individuals and companies together, increased focus on the passive mutual funds and actively managed mutual funds and increased market availability and penetration for companies investing in such portfolios.

[1] https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListingAll=yes&search=Mutual%20Funds

[2] https://www.sebi.gov.in/legal/circulars/dec-2024/introduction-of-a-mutual-funds-lite-mf-lite-framework-for-passively-managed-schemes-of-mutual-funds_90393.html