SEBI on Monday introduced a new framework called Mutual Funds Lite (MF Lite) to simplify the regulatory environment for passively managed mutual fund schemes. The move is expected to open the door for more entities to enter the mutual fund market by easing some of the existing restrictions.
The MF Lite framework reduces the barriers related to net worth, track record, and profitability for sponsors, making it easier for new players to start passively managed funds. Trustees will also face fewer compliance burdens, and the approval process for launching passive schemes will be streamlined, with reduced disclosure requirements. This simplified approach aims to boost market participation, increase investment options for investors, and improve liquidity in the mutual fund space.
Existing asset management companies (AMCs) can also benefit, as they have the option to separate their passive schemes into a new entity under the MF Lite framework. Alternatively, they can retain the schemes within their current setup and still enjoy the reduced regulatory requirements for their passive offerings.
Here’s how it works
Lower barriers for new entrants: MF Lite reduces the eligibility criteria for companies that want to enter the mutual fund market. Under the existing framework, companies need to meet stringent requirements related to net worth, profitability, and track record. MF Lite lowers these barriers, allowing more players to participate, particularly those focused on passive investment products.
Simplified trustee role: Trustees, who are responsible for overseeing mutual funds, will have fewer regulatory burdens under MF Lite. The framework recognizes that passive funds are less complex and require less oversight compared to actively managed funds. This simplification is expected to reduce compliance costs and make it easier for new and smaller companies to manage these schemes.
Streamlined yes and disclosure process: SEBI’s framework will streamline the approval process for launching passive mutual funds, reducing the amount of documentation and disclosures that companies need to provide. This cuts down the time and effort needed to bring new funds to market, making it less cumbersome for asset management companies (AMCs) to launch and manage passive schemes.
Separation of active and passive schemes: Existing AMCs that manage both active and passive mutual funds will have the option to separate their passive schemes into a different entity under the MF Lite framework. This allows them to manage passive funds with fewer regulatory requirements while keeping their active funds under the existing rules. Alternatively, they can continue managing passive funds under their current structure but benefit from the relaxed rules for those schemes.