Getting into the mutual fund business has become easier as SEBI has announced the all-new - Mutual Fund Lite. As the name suggests, it simplifies the management of passively managed funds by easing entry for new players, reduces compliance, provides diversification, and improves market liquidity.

Before we get into the benefits of Mutual Fund Lite, let's briefly understand the types of passive funds covered under this framework.

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What are passive funds and types covered under MF Lite?

Passive funds are financial products designed to emulate the performance of a market index like the Sensex or Nifty 50.

MF Lite scheme encompasses any scheme that qualifies as a passive scheme as identified by the board. "MF Lite" mutual funds comprise index funds, ETFs, or other mutual fund schemes as per below:

• Domestic Equity Passive Funds: These funds track solely domestic equity indices that are broad-based. The combined AUM for these funds must be Rs 5,000 Crores or more as of December 31 each financial year.
• Domestic Debt Passive Funds: These funds are based on domestic government securities, T-bills, or State Development Loans.
• Constant Duration Debt Funds: These funds track domestic debt indices with a constant duration strategy.
• Commodity ETFs and Fund of Funds: This category includes all Gold ETFs, Silver ETFs, and Fund of Funds that exclusively invest in Gold or Silver ETFs.
• Overseas ETFs and Funds of Funds: These are ETFs and FoFs that invest in a single overseas passive fund.
• Single Index Fund of Funds (FoFs): These FoFs invest solely in one domestic or overseas index.

FOFs that invest in multiple indices are not included in the Phase 1 implementation of the MF Lite framework. Private equity funds can now sponsor MF Lite schemes provided they have a minimum of five years of industry experience in managing Rs 2,500 crore in committed capital. Sponsors are also required to maintain their stake in the scheme for a minimum of three years.

If an AMC's total AUM exceeds Rs 1 lakh crore, it must adhere to SEBI’s conventional mutual fund net worth regulations.

What makes MF Lite Framework so great?

SEBI has introduced the MF Lite framework to ease investment in passive funds. Here are the key aspects of the MF Lite initiative:

• Lower Barriers for New Market Entrants

MF Lite reduces the requirements of setting up a mutual fund company in India. Previously firms had to show a high net worth and a solid performance history due to which smaller or newer companies could not easily enter the markets.

This expansion will lead to wider investment choices for consumers and charge low management fees because of competition.

• Streamlined Trustee Responsibilities

SEBI has simplified the roles of trustees for passive mutual fund management. Since passive funds only track market indices, they require lower supervision. With decreased oversight duties, trustees can focus on reducing administrative tasks and compliance-related expenses.

• Accelerated Approval Procedures

The MF Lite framework has revamped the approval process for new passive mutual funds. It has become faster and less bureaucratic. AMCs can introduce new passive funds swiftly and respond more promptly to market demands.

What are the changes MF Lite Framework will bring to the Market

SEBI has introduced the MF Lite framework with the following key objectives:

• Boost Market Competition: By lowering the entry barriers, the framework will increase the number of participants in the mutual fund sector and bring a healthy competitive spirit among the AMCs.
• Provide Cost-Effective Investment Options: This framework will lower the operational costs for fund management companies as they will have the capability to offer passive investment products at affordable prices for investors.
• Expand Investment Choices for Investors: Investors can choose among different passive funds at a lower cost.
• Advanced Financial Inclusion: The initiative will make investing easier and more accessible to a larger population which will bring about financial inclusion in all demographics.

Conclusion

The introduction of the MF Lite framework provides affordable and diverse investment opportunities. MF Lite funds have lower expense ratios and reduced fees that will provide enhanced long-term returns.

Overall, MF Lite represents a positive development and has low-cost diversified investments for a broader spectrum of investors.

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