SEBI

SEBI Announces MF Lite Framework for Passive Funds

To promote innovation and deeper market penetration in India’s mutual fund industry, the regulator, the Securities and Exchange Board of India, introduced a new regulatory framework named ‘Mutual Funds Lite’. This streamlined framework will apply to applicants proposing to offer only passively managed mutual funds schemes, including Exchange-Traded Funds and Index Funds. SEBI also intends to relax compliance requirements and eligibility criteria to facilitate new players into the market for better processes and liquidity.

The MF Lite framework is seen as a notable development, especially when the mutual fund industry in India has grown manifold, taking a quantum leap from Rs 8.3 lakh crore of AUM in 2013 to Rs 61.2 lakh crore by June 2024. However, passive investments have also emerged strongly and account for 17% of the total market share with an AUM of Rs 10.2 lakh crore. The MF Lite framework, therefore, has the potential to be a game-changer in passive investment in India as investors increasingly look for diversified investment avenues at a low cost.

The Rise of Passive Investing

Over the last decade, passive investing has been a strong trend in most global markets. Unlike actively managed funds, where a fund manager makes investment decisions to outperform the market, passive funds are designed to track the performance of an underlying index such as the Nifty 50 or the S&P 500. The passive funds include the following:

• Index Funds: These types of mutual funds mirror or track the portfolio of a particular index.
• Exchange-Traded Funds (ETFs): An investment fund traded on stock exchanges that tracks the performance of an index, commodity, or basket of assets.

The main benefit of passive funds is that they are low-cost due to minimal management intervention. Passive funds are transparent and simple or not complicated because the portfolio reflects the performance of the underlying index.

This is largely a reason for the rise in passive investing, and it allows for diversification and exposure to a wide market segment at a lower cost, making it a phenomenal option for both retail and institutional investors.

Dive into the future of investing by registering your mutual fund with SEBI and harnessing the power of low-cost passive strategies, maximizing returns while minimizing complexity.

SEBI’s MF Lite Framework: What Does It Entail?

The MF Lite framework by SEBI introduces various regulatory relaxations, particularly for fund houses that launch passive schemes. India’s mutual fund regulatory framework applied to both active and passive funds, establishing entry barriers for entities solely interested in passive investment products. This new framework tried to bridge the gap by simplifying compliance and reducing the requirements for these entities.

Relaxed Eligibility Criteria

One of the key relaxations under the MF Lite framework is the ease in sponsor eligibility criteria for a passive fund. Under the conventional regime, the sponsor is required to be of a specified standard in respect of:

• Net worth: One needs minimum financial strength to launch a fund.
• Experience: A proven history of past performances in investment fund management is a must.
• Profitability: Sponsors had to prove past profitability to obtain approval.

The framework has relaxed the specific criteria under MF Lite, mainly for those entities proposing only the passive schemes. With this change, entry barriers will be expected to reduce, as new players can enter the market despite failing to meet the same stringent requirements that large, established firms are put through.

Better Approval Process

The MF Lite license follows an easier approval process for the launch of passive funds. Earlier, approval of the new fund scheme had to be sought through multiple levels and documentation associated with long waiting periods. Therefore, under MF Lite, the launch of passive funds has become faster. This might hasten product innovation and the introduction of more diversified passive investment options in the market.

Reduced Disclosure and Compliance Requirements

Another key feature of the MF Lite framework is that the new regime significantly reduces compliance and disclosure pertaining to passive fund houses. Fund houses operating under the old regime were required to make extensive financial disclosures, comply with many regulations, and practice rigorous governance standards.

SEBI has relaxed these requirements under MF Lite, especially for passively managed funds. This will considerably reduce the regulatory load of the fund houses so that they can focus more on product development and innovation instead of compliance.

Main Objectives of the MF Lite Framework

The introduction of MF Lite aligns perfectly with the broader goals set by SEBI for the Indian financial markets on retail participation, liquidity, and financial innovation. Some of the key objectives behind this initiative are as follows:

· Ease of Market Entry

SEBI’s main objective behind the MF Lite framework is to facilitate the easy entry of new players in the mutual fund space. With reduced net worth, track record, and profitability requirements, SEBI expects the entry of smaller, relatively nimble firms focusing on passive strategies. This will lead to more innovative and varied investment products in the market.

· Greater Market Penetration

Mutual fund penetration in India is quite low compared to developed markets. The government is working towards making mutual fund products accessible to a larger audience in tier 2 and tier 3 cities by ensuring less hassles in entry barriers with easier regulations through SEBI. Simplified regulations under MF Lite will encourage more investors to invest in passive funds, ultimately increasing the overall participation.

· Improved Liquidity and Competition

More participants in the mutual fund market leads to greater liquidity. Once more fund houses offer passive schemes, competition will increase, leading to better pricing, lower fees, and better returns for the investor. The increased competition might drive innovation in product offerings.

· Retail Investors Diversifying Investments

Investors can diversify better if more passive funds are available in the market. Passive funds offer exposure to a broad range of sectors and asset classes, making it easier for the average investor to diversify portfolios at more attractive levels. This can be very useful for a risk-averse investor who wants exposure to broad market indices without needing active management.

· Promoting Innovation

A streamlined regulatory framework will likely promote innovative and new passive investment product offerings by fund houses. For instance, fund houses can launch funds tracking niche indices or thematic indices targeting technology, renewable energy, or healthcare sectors. Such innovations could attract a greater diversity of investors and allow them to have options that best suit their needs.

Role of Existing AMCs in MF Lite Framework

For the existing AMC operating both the active schemes as well as passive schemes, SEBI has provided two options:

· Hive off Passive Schemes

The MF Lite framework permits AMCs to separate their passive schemes into separate entities. Therefore, they can keep their active and passive funds separately, and the passive schemes would enjoy a relaxed regulatory environment.

· Continue Under Existing Regulations

This can also continue the passive schemes that AMCs have under the existing mutual fund regulations. However, the relaxed disclosure requirements for passive funds will apply even in this case. It also confers more flexibility, allowing the larger AMCs to decide how to structure operations without essentially disrupting their existing business models.

Streamline your asset management operation by registering an asset management company and taking advantage of SEBI’s MF Lite framework, choosing to hive off passive schemes or continue under relaxed regulations for greater flexibility.

How can MF Lite affect the Mutual Fund Industry in India?

MF Lite’s introduction is more likely to create a stir in India’s mutual fund industry, especially in the passive investment space. Therefore, MF Lite can affect the Mutual Fund Industry of India in the following ways:

· Passive Funds Growth

With simpler regulations and minimal entry barriers, the AUM of passive funds is bound to grow even faster. According to a report by MOAMC, passive funds already command 17% of the total market share, with an AUM of Rs 10.2 lakh crore as of June 2024. The MF Lite framework will grease the wheels further.

· New Entrants to the Market

The relaxed eligibility criteria will attract new players like fintech startups, online investment platforms, and smaller asset managers. Such new entrants would provide innovative business models and cutting-edge technology.

· Lower Costs to Investors

As more passive funds enter the market, the competition could further lower investors’ costs. Given that passive funds already have lower management fees than active funds, the net result of such new entrants is bound to be further cuts in fees for the benefit of retail investors.

· Greater Variety of Products

These simplified regulations will encourage the introduction of new, innovative passive investment products, such as thematic ETFs, sector-specific index funds, and funds based on environmental, social, and governance criteria. This will give investors wider avenues for portfolio diversification.

Conclusion

SEBI ushers in a new era for passive investing in India through its MF Lite framework. Fewer regulatory hurdles and lighter compliance requirements imply more players joining the market, and existing fund houses are free to innovate and grow. This is bound to spur competition, reduce costs, and bring various passive investment products into the market, benefiting investors and the mutual fund industry.

Thus, as passive investing continues to grow, the MF Lite framework will increasingly support this momentum and become one of the mainstays in the investment landscape in India. For retail investors, it will lead to more options, better diversification, and reduced fees, and for fund houses, it will lead to new opportunities to innovate and increase internet market share.

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