MF Lite: Decoding Sebi's Passive Fund Framework

Passive investing is gaining in popularity among retail investors in India. According to data from the Association of Mutual Funds in India (Amfi), the total assets under management for passive funds have witnessed growth over recent years, by the end of March 2026, the Assets Under Management (AUM) for passive funds in India surged to Rs 14.11 lakh crore, representing a massive 23.1 per cent year-on-year growth and the number of investor folios grew by 37.7 per cent to 57.1 million.

As retail investor interest in passive investing increases, the Securities and Exchange Board of India (Sebi) recognised the need for a tailored regulatory approach and introduced the MF Lite framework.

Notably, the framework was formally integrated into the Sebi (Mutual Funds) Regulations, 2026, which came into effect on April 1, 2026.

What Relaxations Are Offered Under the MF Lite Framework?

The MF Lite framework is a simplified regulation designed for asset management companies which want to launch only passively managed schemes. Traditionally, all mutual funds in India were governed by the same rulebook. However, actively managed funds require more oversight to protect investors, while passive funds, which mirror established indices, have relatively simpler operations.

Thus, this framework acknowledges the structural difference by offering a simpler registration and compliance process for passive schemes, including index funds and fund of funds. The MF lite mechanism seeks to reduce the capital requirements for new fund houses and ease compliance burdens. In exchange for these relaxations, the framework imposes restrictions to ensure the schemes remain passive and stick closely to their benchmark indices.

Why Was The MF Lite Framework Introduced?

One of the key reasons behind the introduction of the MF-Lite framework was to decrease entry barriers for new asset management companies and enhance liquidity and diversification in the passive fund space.

Compared to the regulations governing traditional mutual funds, the MF Lite framework offers financial and operational relaxations. For MF-Lite, Sebi lowered the minimum net worth entry barrier for sponsors to Rs 50 crore, which can be further reduced to Rs 25 crore after five consecutive profitable years.

Additionally, private equity firms with at least Rs 2,500 crore in committed capital and five years of experience can act as sponsors for such funds. Operationally, fund houses which are under the MF Lite Framework benefit from fast-tracked Scheme Information Documents that only need annual updates and are exempt from filing a separate Key Information Memorandum.

The framework also reduces routine administrative burdens for trustees, streamlines daily compliance tasks, and provides a distinct clause allowing existing legacy fund houses to carve out their passive schemes into a separate, lower-cost MF Lite entity.

How Investors Can Potentially Benefit From The MF Lite Framework

Retail investors can also potentially gain from the adoption of the framework as they get more choices among passive investing options. Additionally, the reduced compliance and operational costs for fund houses can also translate into relatively lower total expense ratios for investors, which in turn lowers costs for investors.