SEBI Likely to Launch MF Lite Soon: How it Can Benefit Investors

The Securities and Exchange Board of India (SEBI) is expected to introduce a series of measures including the launch of new asset class and mutual fund lite regulations in its Board meeting on September 30.

SEBI Chairperson Madhabi Puri Buch recently highlighted the market regulator’s aim to support growth in the passive investment space. SEBI will likely roll out a new set of regulations called “MF Lite” for passive funds. It aims to bridge the gap between mutual funds (MFs) and portfolio management services (PMS).

During an industry event on Thursday, Buch said they had a very detailed consultation on the distribution of passive funds. They are open to any suggestions for relaxation in this area to facilitate the growth of these funds across the country.

SEBI chief added that technological advancements could help the corporate bond market grow as rapidly as the equities market.

What is Mutual Fund Lite?

MF Lite is a simplified framework for mutual funds that will handle only passive schemes like index funds and exchange-traded funds (ETFs). Under the MF lite, fund houses that focus only on passive schemes will operate with relaxed compliance requirements, reduced costs, and fewer regulatory burdens.  

New players desirous of launching only passive MF schemes will register under the proposed MF Lite Regulations.

In a consultation paper shared in July, SEBI had recommended a lenient framework with minimal regulatory constraints referred to as MF Lite Regulations for passive mutual fund schemes. The initiative aims to simplify the process of market entry, boost participation of new entities, lessen compliance burdens, enhance market reception, enable investment diversification, increase market liquidity and encourage innovation.

Key Provisions of MF Lite

The consultation paper proposed to reduce the barriers for asset management companies (AMCs) offering passive funds. It may reduce the net worth requirement for sponsors to Rs 35 crore from the current Rs 50 crore.

According to the consultation paper, the total expense ratio (TER) charged by passive schemes across the industry is generally around 20 bps. Hence, the TER charged on passive AUM of Rs 10,000 crore would be around Rs 20 Crore and if 50 per cent of the same is assumed as a management fee, the revenue for an AMC will be Rs 10 crore.

So, in order to earn a revenue of Rs 10 crore, AMC shall need to achieve a breakeven AUM of at least Rs 10,000 Crore, which the AMC running only passive schemes, may achieve over a period of time.

“Moreover, unlike active MF schemes, passive schemes are simple and rule based by nature, therefore, financial experience of five years may not be relevant under the main eligibility route of MF Lite Regulations,” SEBI proposed in the paper.

How will MF Lite benefit the investors?

The relaxed regulation framework will attract new participants to the mutual fund industry, especially smaller players who may have found existing regulations too demanding.

In addition, the existing mutual fund companies can benefit by separating their passive fund operations into a new entity under MF Lite. This will allow them to focus on the growth of passive assets without the complexities of managing active funds.

For retail investors, MF Lite could provide more affordable passive investment options. This will allow investors to potentially access low-cost funds that track both equity and debt markets.