New rules for easier passive mutual fund investing with Sebi’s new MF Lite framework
The Securities and Exchange Board of India (Sebi) has approved a new and simplified regulatory framework for all entities which launch only passive mutual fund schemes called the liberalised Mutual Funds Lite (MF Lite) framework, according to a Business Standard report, which added that this is to reduce compliance requirements as well as encourage the presence of new market players.
₹61.2 lakh crore in June 2024, compared to ₹8.3 lakh crore in December 2013″ title=”The combined assets under management (AUM) of India’s mutual fund industry grew over seven times to ₹61.2 lakh crore in June 2024, compared to ₹8.3 lakh crore in December 2013″ />What is the difference between passive and active funds?
Passive mutual funds replicate ETFs and index funds whose portfolios can be easily tracked, whereas, active mutual funds need expert fund managers to actively monitor them and make investments in securities of their choices accordingly.
The combined assets under management (AUM) of India’s mutual fund industry grew over seven times to ₹61.2 lakh crore in June 2024, compared to ₹8.3 lakh crore in December 2013, according to the report, which added that the AUM of passive mutual funds grew to ₹10.2 lakh Crore with 17% of total market share, while for active funds, it was ₹50.9 lakh crore as at June 2024.
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What are the key changes of the new passive mutual fund rules?
Relaxed Eligibility Criteria: Sponsors will have to face lesser stringency of rules in terms of net worth, track record, as well as profitability.
Simplified Approval Process: The approval process for launching new passive mutual fund schemes will be streamlined and simplified.
Reduced Disclosure Requirements: Compliance requirements will be eased, which can reduce the burden on mutual fund houses.
How are the new passive mutual fund rules different from before?
The regulatory framework was uniformly applicable to all mutual fund schemes, which can be disadvantageous for schemes which focus on only passive investing in terms of relevancy.
What are the objectives of the new mutual fund framework?
- Ease of Entry: One of the main objective of the MF Lite framework is to make it easier for new players to enter the mutual fund industry.
- Increased Penetration: Market penetration can increase since the barriers to entry are now reduced.
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- Enhanced Liquidity: Having a larger number of market players contributes to increased liquidity and competition.
- Investment Diversification: A wide range of passive fund options provide investors with more diversification choices.
- Innovation: The new framework can foster innovation and development of new types of passive fund products.
What are the key provisions of the new MF Lite Framework?
Separate Entity Option: Existing AMCs with both active and passive schemes can choose to hive off their passive schemes into a separate entity.
Relaxed Requirements: Passive schemes under MF Lite will be subject to relaxed disclosure and other regulatory requirements.
What about existing asset management companies (AMCs) which offer both passive and active schemes?
Existing AMCs can separate their passive schemes to a different group entity or even if they don’t, the new framework would be applicable to the passive funds alone, according to the report.
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