SEBI Launched MF Lite Framework to Ease Compliance For Passive Mutual Fund Schemes

On December 31, 2023, the Securities and Exchange Board of India (SEBI) announced the launch of the Mutual Funds Lite (MF Lite) framework to simplify the compliance process for entities launching passively managed mutual fund schemes. This initiative aims to foster innovation, encourage new entrants, and diversify investments in the mutual fund sector.

Objective and Scope of MF Lite

The MF Lite framework is specifically designed for passive investment schemes, such as index funds, exchange-traded funds (ETFs), funds of funds (FoFs), and other schemes identified by SEBI. It seeks to streamline processes and reduce barriers for entities focusing solely on passive products, thereby enhancing market liquidity and making it easier for new players to enter the industry.

The framework is based on recommendations from a SEBI-constituted working group, which were later endorsed by the Mutual Funds Advisory Committee. To implement the provisions of MF Lite, SEBI has amended the Mutual Funds Regulations 1996, with the changes set to take effect on March 16, 2025.

Key Features of the MF Lite Framework

• Eligibility Criteria: Sponsors must meet specific eligibility criteria, including a minimum collective experience of 20 years for key personnel. Private equity funds can also sponsor MF Lite entities under certain conditions.
• Simplified Compliance: The framework reduces compliance burdens by easing disclosure norms and allowing optional reporting for trustees.
• Streamlined Processes: Designed to lower barriers for entities focused solely on passive investment products.

Coverage and Scope of Eligible Schemes

The MF Lite framework will initially cover schemes based on domestic equity indices with an asset under management (AUM) threshold of ₹5,000 crore or more, as well as G-Sec-based debt funds, gold and silver ETFs, and certain overseas ETFs. Additionally, existing mutual funds managing both active and passive schemes can migrate their passive portfolios to a separate entity under the new framework.

Simplified Scheme Information Documents (SIDs)

The new framework introduces simplified Scheme Information Documents (SIDs) for passive funds, making it easier for investors to access relevant information. It also permits the creation of hybrid ETFs that combine both equity and debt exposure.

To ensure transparency and build investor confidence, the MF Lite framework mandates monthly portfolio disclosures for debt passive schemes and quarterly disclosures for equity passive schemes. SEBI’s focus on robust governance while offering flexibility to asset management companies aims to provide a balanced approach to regulation.

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