Sebi Introduces MF Lite Framework For Passively Managed Schemes: Check Details

In a move to simplify fund regulations and encourage innovation, the Security and Exhnage Board of India (Sebi) has released a Mutual Fund Lite framework for passively managed schemes. This is a significant shift from the one-size-fits-all regulatory approach that had till now regulated both active and passive mutual fund schemes (MF Schemes) so far.

“As various aspects of the existing regulatory framework may not be necessary for passive funds, a relaxed regime with light-touch provisions 'the MF Lite Framework' is being introduced only for passive MF schemes,” the market regulator stated in its official circular.

It further added that this framework is being introduced with the intent to;

- Promote ease of entry

- Encourage new players

- Reduce compliance requirements

- Increase penetration

- Facilitate investment diversification

- Increase market liquidity; and

- Foster innovation

What Is MF Lite?

MF Lite is basically a simplified regulatory regime that intends to allow mutual fund houses to focus exclusively on ‘passive schemes’. These funds track market indices, offering lower costs and reduced management efforts as compared to actively managed funds.

Why This Change?

Under the current system, active and passive mutual funds are subject to the same set of regulatory requirements. This has often led to disproportionately high costs and compliance hurdles for entities solely focused on passive schemes.

What Are the Key Features Of MF Lite Framework?

In its initial phase, the MF Lite framework is going to cover the following categories of passive schemes;

1) Domestic Equity Passive Indices: Passive funds are based on only domestic equity passive indices (broad indices tracked by passive funds or act as the primary benchmark for actively managed funds), with collective Assets Under Management (AUM) of Rs 5,000 Cr. and above as of December 31 of each financial year.

AMFI, in consultation with Sebi, is supposed to prescribe the list of such domestic equity indices on a periodic basis.

2) Debt-Based Passive Funds: Includes government securities (G-Sec), Treasury Bills (T-bills), State Development Loans (SDLs), and constant-duration passive debt funds.

The collective AUM threshold remains Rs 5,000 crore.

3) Commodity-Based ETFs and FoFs: Gold ETFs, Silver ETFs, and fund-of-funds investing in these commodities are included. (FoF refers to Funds of Funds).

4) Overseas ETFs and FoFs: Funds tracking single underlying overseas passive funds, provided the benchmarks meet Sebi’s diversification and AUM criteria.

5) Single-Index Domestic/Overseas FoFs: FoFs investing in one index are eligible, but those spanning multiple indices are excluded for now.

“All FoFs investing in more than one index shall not be covered under the MF Lite framework under phase 1 of the implementation,” the circular states.

Uniform Guidelines for Overseas Indices

To ensure standardisation, the market regulator has laid out guidelines for equity schemes based on overseas indices as follows;

• Overseas ETFs/Index funds and FoFs investing in overseas ETF/index funds comply with the diversification requirement of a minimum of 10 securities in an equity index portfolio.

• Passive funds based on only those overseas equity passive indices whose AUM exceeds a minimum threshold of $20 billion as of December 31 of each financial year will be covered under phase 1.

• Additionally, the market regulator has also detailed the eligibility and compliance criteria for MF Lite entities in the official circular.

What Does This Mean For Investors?

The introduction of the MF Lite framework is expected to;

• Expand investment choices for investors with relaxed norms as new players may enter the market to bring a wider range of passive funds.

• A reduced compliance burden may translate to a lower expense ratio for the investors.

• Since Gold and silver ETFs and FoFs investing only in gold or silver ETFs are also included under the MF Lite framework. These funds are expected to focus exclusively on gold or silver and offer investors a straightforward, low-cost way to gain exposure to these precious metals.

The standardised indices and periodic updates will enable clarity and comparability across passive schemes, ultimately working to the benefit of investors.