SEBI Launches "Mutual Funds Lite" Framework for Passive Investment Schemes

On December 31, 2024, the Securities and Exchange Board of India (SEBI) announced the introduction of the Mutual Funds Lite (MF Lite) framework, specifically designed for passively managed mutual fund schemes.

The MF Lite framework covers mutual funds that include only index funds, exchange-traded funds (ETFs), funds of funds (FoFs), and other passive mutual funds. This initiative aims to lower entry barriers, streamline compliance requirements, and enhance liquidity and diversification within the mutual fund industry.

Phase 1 of MF Lite Framework

The first phase of the MF Lite framework applies to passive funds tracking domestic equity indices with a total assets under management (AUM) of ₹5,000 crore or more as of December 31 of each financial year.

Additionally, domestic target-maturity debt passive funds linked to government securities (G-Secs), treasury bills (T-bills), and state development loans (SDLs) are included, along with constant-duration passive funds based on debt indices, provided they meet the ₹5,000 crore AUM threshold.

The framework also covers gold and silver ETFs, FoFs that invest in these ETFs, as well as overseas ETFs and FoFs focused on a single domestic or international index or single underlying passive fund.

Guidelines for Equity Passive Funds

SEBI has outlined specific guidelines for launching equity passive funds. The regulatory authority mandates that the index serving as the basis for passive schemes must be broad-based and standardized across the industry.

ETFs or FoFs investing overseas must comply with diversification norms by holding a minimum of 10 securities. Passive funds that follow overseas equity indices with a market cap threshold of $20 billion or more are also included under the MF Lite framework.

A notable feature of the framework is the mandatory fast-tracking of scheme information documents (SIDs). However, asset management companies (AMCs) will not need to file a separate Key Information Memorandum (KIM) for each passive scheme.

Permissible Investments Under MF Lite

Funds under the MF Lite framework can invest in equity, plain vanilla debt securities, and commodities. They can also allocate resources to ETF commodity derivatives and equity derivatives linked to the underlying index.

Regarding the tracking difference (TD), SEBI specified that for equity-oriented passive schemes, the TD must be targeted at 50 basis points (bps) above the actual total expense ratio (TER) charged.

Introduction of Hybrid Passive Funds

The MF Lite framework also allows AMCs to launch hybrid passive funds, which may be balanced, equity-oriented, or debt-oriented. Each category is limited to one ETF and one index fund, with the minimum subscription amount for New Fund Offers (NFOs) set at ₹10 crore.

Debt-oriented passive funds must disclose their Debt Index Replication Factor (DIRF), along with their tracking error and tracking difference, on their websites. The framework also enables AMCs to introduce close-ended debt passive schemes that are exclusively based on target-maturity indices.