What is Mutual Fund Lite? All you need to know

The Securities and Exchange Board of India (Sebi) recently introduced a new framework called Mutual Fund Lite (MF Lite). The aim of this framework is to simplify the rules for managing passively managed mutual funds.
By reducing regulatory burdens, Sebi aims to encourage more companies to enter the mutual fund market and offer a wider range of investment options for investors.
This move is seen as a way to boost participation in the mutual fund space while improving liquidity and offering investors more passive investment products.
One of the key benefits of the MF Lite framework is that it lowers the barriers for new companies to start offering passively managed mutual funds. Traditionally, companies looking to enter the mutual fund market had to meet strict requirements related to net worth, profitability, and track record. These rules made it difficult for smaller or newer firms to enter the market.
With MF Lite, Sebi has relaxed these requirements, making it easier for companies to start offering passive investment products. This could lead to increased competition in the market and more choices for investors who prefer passive funds.
Another major change brought by MF Lite is a simpler role for trustees. Trustees are responsible for overseeing mutual funds and ensuring they operate in the best interests of investors. In the past, managing mutual funds, especially actively managed ones, required a lot of oversight.
However, passive funds are generally less complex as they simply track market indices without the active buying and selling of stocks. Recognising this, Sebi has reduced the regulatory burden on trustees for passive funds under MF Lite. This simplification means lower compliance costs, making it easier for companies to manage their passive schemes.
Launching new mutual funds often involves a lot of paperwork and disclosures. Companies need to provide detailed documentation to Sebi before they can start offering a new fund. This process can be time-consuming and expensive.
Under the MF Lite framework, Sebi has streamlined the approval process for launching passive mutual funds. The amount of documentation and disclosures required has been reduced, allowing companies to bring new funds to market more quickly. This will help asset management companies (AMCs) launch and manage passive schemes with less hassle.
Existing AMCs that manage both active and passive mutual funds have two options under the new framework. They can either separate their passive schemes into a new entity under MF Lite or continue managing their passive funds under their current setup.
If they choose to separate their passive funds, they will be able to benefit from the reduced regulatory requirements for those schemes.
On the other hand, if they keep everything under one roof, they can still enjoy the relaxed rules for their passive offerings. This flexibility allows existing companies to choose the best way to manage their funds while keeping in line with Sebi’s new rules.
For investors, the introduction of MF Lite could mean more options when it comes to passive investment products.
As more companies enter the market and launch passive mutual funds, investors will have a wider range of choices. This could potentially lead to better returns and lower costs, as competition increases.
Additionally, the simplified regulatory framework for trustees and faster approval processes will help bring new passive funds to market more efficiently. This could improve liquidity in the mutual fund space, making it easier for investors to buy and sell their units when needed.