SEBI unveils relaxed MF Lite framework for passive mutual funds: Scope, eligibility, and key provisions

The Securities and Exchange Board of India (SEBI) on Tuesday introduced the Mutual Funds Lite (MF Lite) framework, a relaxed regulatory regime for passively managed mutual fund schemes. In its December 31 circular, SEBI noted that the existing regulatory framework for mutual funds does not differentiate between active and passive schemes, imposing uniform entry and compliance requirements on both.

The MF Lite framework seeks to reduce compliance requirements, encourage new entrants, increase penetration, facilitate investment diversification, increase market liquidity and foster innovation in the mutual fund industry, the regulator said.

Scope of MF Lite Framework

The MF Lite framework will initially cover passive schemes such as index funds, exchange-traded funds (ETFs), and fund-of-funds (FoFs) based on:

• Domestic equity indices with a minimum collective AUM of ₹5,000 crore.

• Debt indices based on G-Secs, T-bills, and SDLs with the same AUM threshold. Gold and silver ETFs, along with associated FoFs.

• Select overseas ETFs and FoFs investing in single passive funds with a minimum benchmark AUM of $20 billion.

• FoFs investing in multiple indices or actively managed underlying funds are excluded from the first phase of implementation.

Key provisions and eligibility

Under the MF Lite framework, sponsors must appoint experienced personnel with at least 20 years of combined leadership experience in the AMC.

Given considerably lower risks associated with passively managed schemes, AMCs may appoint a separate Chief Risk Officer (CRO) on a voluntary basis, otherwise, the CCO may also act as the CRO of the AMC, subject to his/her eligibility and experience in risk management.

Private equity funds can sponsor MF Lite schemes, provided they meet net worth and investment experience criteria.

A minimum net worth of ₹75 crore must be maintained by sponsors, locked in for three years.

SEBI also mandated that MF Lite asset management companies (AMCs) deploy their liquid net worth in safe instruments such as government securities or AAA-rated debt instruments to minimise liquidity risks.

Constitution and Governance

An MF Lite must be constituted as a trust, with the trust deed registered under the Indian Registration Act, 1908. SEBI, in consultation with AMFI, will prescribe a standard trust deed aligning with roles and responsibilities outlined in the regulations.

Trustees’ responsibilities will include oversight of related party transactions, conflicts of interest, and market misconduct. However, certain governance relaxations, such as optional Risk Management Committees (RMCs) and audit committees for trustees, are allowed.

“In case an existing AMC doesn’t hive off its passive schemes and continues to manage the passive schemes under the current MF Regulations, the reduced roles and responsibilities of trustees...shall also be applicable to the existing trustees of such AMC but only pertaining to the passive funds allowed under the MF lite framework,” SEBI circular said.

The AMC Board will assume primary accountability for investor protection and core regulatory compliance, including periodic reporting to SEBI, overall risk management, and filing of offer documents with SEBI and obtaining regulatory approvals.

Operational provisions

Hybrid ETFs and other provisions

AMCs, regardless of their registration under MF Lite or the extant MF Regulations, can now launch hybrid passive funds, which combine equity and debt instruments, offering investors a single product with diversified exposure. These funds will be categorised as Balanced (40%-60% equity and debt each), Equity Oriented (65%-80% equity and 20%-35% debt), or Debt Oriented (65%-80% debt and 20%-35% equity). Each AMC can launch one ETF and one Index Fund per category.

Hybrid ETFs must comply with strict asset allocation norms evaluated quarterly, and the underlying indices will be composed of a mix of equity and debt indices from SEBI’s permitted list. Additionally, these ETFs will disclose indicative NAV (iNAV) at least four times daily.

For debt-oriented passive schemes, SEBI mandated disclosure of a “Debt Index Replication Factor (DIRF),” highlighting the replication accuracy of the fund portfolio compared to its underlying index. Close-ended debt passive schemes based on target maturity indices are also permitted, with ratings potentially dropping below AAA but remaining investment grade.

Fast-tracking and compliance

The registration of MF Lite schemes will include mandatory fast-tracking of Scheme Information Documents (SIDs). AMCs under this framework will not require separate Key Information Memorandums (KIMs) for each scheme. SEBI has replaced the Half-Yearly Trustee Report (HYTR) with an Annual AMC Report (YAR) for MF Lite.