Sebi Launches MF Lite Framework to Simplify Compliance for Passive Fund Schemes

The Securities and Exchange Board of India (Sebi) has introduced the Mutual Funds Lite (MF Lite) framework. This initiative aims to simplify compliance for entities launching passively managed mutual fund schemes. It seeks to attract new participants, foster innovation, and encourage investment diversification within the mutual fund sector.

Representative image

The MF Lite framework targets passive schemes like index funds, exchange-traded funds (ETFs), and funds of funds (FoFs). Sebi's goal is to streamline processes and lower entry barriers for entities focusing on passive investment products. This is expected to boost market liquidity and make it easier for new players to enter the market.

Eligibility Criteria and Compliance

Sebi has set specific eligibility criteria for sponsors under the MF Lite framework. Key personnel must collectively have at least 20 years of experience. Additionally, private equity funds can sponsor MF Lite entities under certain conditions. The framework also eases compliance requirements, such as simplified disclosure norms and optional reporting for trustees, to reduce operational burdens.

The MF Lite framework will initially apply to schemes based on domestic equity indices with assets under management (AUM) of Rs 5,000 crore or more. It also covers G-Sec-based debt funds, gold and silver ETFs, and select overseas ETFs. Existing mutual funds managing both active and passive schemes can transfer their passive portfolios to a separate entity under this new framework.

Transparency and Governance

Sebi's circular introduces simplified Scheme Information Documents (SIDs) for passive funds. It also allows hybrid ETFs that combine equity and debt exposure. To enhance transparency, monthly portfolio disclosures are required for debt passive schemes, while quarterly disclosures are mandated for equity passive schemes.

The MF Lite framework is based on recommendations from a Sebi-constituted working group. These recommendations were later endorsed by the Mutual Funds Advisory Committee. Sebi has amended its Mutual Funds Regulations 1996 to include the MF Lite provisions, which will take effect on March 16, 2025.

This initiative aims to boost investor confidence by ensuring robust governance while maintaining flexibility for asset management companies. By simplifying compliance processes, Sebi hopes to encourage more innovation and diversification in the mutual fund industry.