Understand MF Lite Framework Introduced by SEBI for Passive Funds

Securities and Exchange Board of India (SEBI) introduced a new framework called Mutual Fund Lite or MF Lite. It aims to simplify the rules for passively managed mutual funds in India. The change is a positive move for companies looking to enter this space and also for investors. How? We will learn the details in this article.

What are passive funds?

Before we understand MF Lite, it is essential to learn about passive funds as it is for passive funds. Passive funds are investment vehicles that aim to replicate the performance of a specific market index, such as the Sensex or the Nifty 50. Unlike actively managed funds, which aim to outperform the market, passive funds simply seek to match the performance of their underlying index. Passive funds can be broken down into two sub-categories:

Index Funds: These are mutual funds that track a specific market index, such as the Nifty mid-cap index.
Exchange-Traded Funds (ETFs): ETFs are similar to index funds but trade on stock exchanges like individual stocks.

SEBI Introduces MF Lite Framework for Passive Funds to Ease Investing

Here are the details related to MF Lite:

1. Easier Access for New Players:

For new companies looking to enter this space, it reduces the entry barriers. Traditionally, starting a mutual fund company in India required meeting strict criteria, including a high net worth and a proven track record. This made it challenging for smaller or newer firms to enter the market. MF Lite has simplified this process, allowing more companies to offer passive investment products. This means investors have more choices and potentially lower fees.

2. Simplified role for trustees:

SEBI has streamlined the role of trustees for passive mutual funds. Previously, trustees had extensive oversight responsibilities, especially for actively managed funds. However, passive funds, which track market indices, require less oversight due to their simpler nature. This simplification means trustees can focus on key areas, reducing their administrative burden and compliance costs. This makes it easier for companies to manage passive fund schemes, potentially encouraging more players to enter the market.

3. Faster approval process:

SEBI has simplified the process for launching new passive mutual funds. Previously, companies faced lengthy approval procedures involving extensive documentation. Now, with MF Lite, the approval process is faster and less bureaucratic, allowing AMCs to introduce new passive funds more efficiently.

4. Options for existing asset management companies:

Existing asset management companies (AMCs) have a choice when it comes to their passive mutual funds:

Separate Entity: They can create a new separate company specifically for their passive funds. This allows them to take advantage of the simplified regulations for MF Lite.
Keep Together: They can continue managing their passive funds under their existing structure. Even in this case, they'll still benefit from the relaxed rules for passive funds.

Objectives of MF Lite Framework

MF Lite is introduced by SEBI with the following objectives:

Increase Competition: To promote competition in the mutual fund industry by reducing the barriers to entry for new players.
Offer Lower-Cost Products: To make passive investment products more accessible to investors by reducing the operational costs for fund houses.
Enhance Investor Choice: To provide investors with a wider range of investment options, especially low-cost passive funds.
Promote Financial Inclusion: To encourage financial inclusion by making investing more accessible to a broader range of individuals.
Streamline Regulatory Requirements: To simplify the regulatory framework for passive mutual funds, reducing the burden on fund houses.

How will MF lite be beneficial for investors?

Let us now look at different ways through which MF Lite will benefit the investors;

Lower Costs: MF Lite funds are likely to have lower expense ratios than traditional mutual funds. It means investors pay less in fees, leading to higher returns over the long term.
Greater Accessibility: The relaxed entry requirements for MF Lite funds make it easier for smaller asset management companies to launch new products. It increases the variety of investment options available to investors.
Simplified Investment Process: MF Lite funds will require less documentation and paperwork, making it easier for investors to invest.
Potential for Higher Returns: Lower expense ratios can lead to higher returns for investors over the long term.

Before you go

Overall, MF Lite is a positive development for Indian investors seeking low-cost, diversified investment options. By providing a more streamlined and efficient framework, MF Lite can help investors achieve their financial goals.