SEBI Unveils MF Lite Framework: A Boost for Passive Mutual Fund Schemes

The Securities and Exchange Board of India (SEBI) has unveiled the Mutual Funds Lite (MF Lite) framework, aimed at simplifying the compliance process for passive mutual fund schemes like index funds and exchange-traded funds (ETFs). Set to take effect on March 16, 2025, this initiative seeks to foster innovation, encourage new players, and promote investment diversification in the mutual fund industry.

“The MF Lite Framework” is being introduced only for passive Mutual Fund schemes, with an intent to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, facilitate investment diversification, increase market liquidity and foster innovation,’ as mentioned in the SEBI report.

Focus on Passive Investments
The MF Lite framework focuses exclusively on passive investment products. It covers index funds, ETFs, funds of funds (FoFs), and other schemes specified by Sebi. The goal is to streamline processes and lower entry barriers for fund houses focusing on passive investments, thereby increasing market liquidity and broadening investor choices.

Eligibility and Operational Relaxations
Sebi's framework introduces distinct eligibility requirements for sponsors, including a minimum collective experience of 20 years for key personnel. Private equity funds can also sponsor MF Lite entities under specific conditions. Additionally, compliance norms have been eased, with simpler disclosure requirements and optional trustee reporting to reduce operational burdens.

Scope and Flexibility
Initially, the framework will apply to:
Domestic equity index schemes with assets under management (AUM) of Rs 5,000 crore or more.
G-Sec-based debt funds.
Gold and silver ETFs.
Certain overseas ETFs.
Existing fund houses with active and passive schemes can shift their passive portfolios to a separate entity under MF Lite rules.

Enhanced Transparency for Investor Confidence
To improve transparency, Sebi mandates:
Monthly portfolio disclosures for debt passive schemes.
Quarterly portfolio disclosures for equity passive schemes.
Hybrid ETFs combining equity and debt exposures will also be permitted under the framework.

Encouraging a Thriving Market
The MF Lite framework stems from recommendations by Sebi’s working group and its Mutual Funds Advisory Committee. By amending its Mutual Funds Regulations, 1996, Sebi has created an investor-friendly structure that ensures strong governance while offering flexibility to fund houses.