Sebi introduces Mutual Funds Lite framework to boost passive fund schemes

Capital markets regulator Sebi on Tuesday announced the launch of the Mutual Funds Lite (MF Lite) framework to simplify the compliance process for entities launching passively managed mutual fund schemes.

The framework is designed to encourage new entrants, promote innovation, and foster investment diversification in the mutual fund industry.

The Securities and Exchange Board of India (Sebi) said the MF Lite framework will apply to passive schemes, including index funds, exchange-traded funds (ETFs), funds of funds (FoFs), and others specified by the regulator.

It intends to streamline processes and reduce barriers for entities focused solely on passive investment products, a move expected to increase market liquidity and ease entry for new players.

The framework is based on recommendations made by a Sebi-constituted working group, which were later endorsed by the Mutual Funds Advisory Committee. The markets regulator amended its Mutual Funds Regulations 1996 to incorporate the MF Lite provisions, effective March 16, 2025.

It also mandates distinct eligibility criteria for sponsors, including a minimum collective experience of 20 years for key personnel, and allows private equity funds to sponsor MF Lite entities under specific conditions.

Further, the framework simplifies compliance requirements, such as eased disclosure norms and optional reporting for trustees to reduce operational burdens.

The markets watchdog said the MF Lite framework would initially cover schemes based on domestic equity indices with an asset under management (AUM) threshold of Rs 5,000 crore or more, G-Sec-based debt funds, gold and silver ETFs, and certain overseas ETFs.

Existing mutual funds managing both active and passive schemes can migrate their passive portfolios to a separate entity under the new framework, as per the circular.

Sebi's circular also introduces simplified Scheme Information Documents (SIDs) for passive funds and permits hybrid ETFs combining equity and debt exposure.

The regulator has also emphasised transparency by requiring monthly portfolio disclosures for debt passive schemes and quarterly disclosures for equity passive schemes.

The MF Lite framework aims to boost investor confidence by ensuring robust governance while maintaining flexibility for asset management companies.