SEBI Introduces Mutual Funds Lite Framework for Passively Managed Schemes

The Securities and Exchange Board of India (SEBI), on December 31, 2024, announced the launch of the Mutual Funds Lite (MF Lite) framework for passively managed mutual fund schemes.

MF Lite is a mutual fund that consists only of index funds, exchange-traded funds (ETFs), or funds of funds (FoFs) and other mutual funds. The introduction of the MF Lite framework for passively managed mutual funds aims to reduce entry barriers, reduce compliance requirements, and promote liquidity and diversification.

Phase 1 of the MF Lite framework is applicable to passive funds that consist of domestic equity indices and cumulative assets under management (AUM) of Rs 5,000 crore or more as of December 31 of each financial year.

Domestic target maturity debt passive funds based on G-Secs, T-bills, and State Development Loans (SDLs) are included along with domestic constant duration passive funds based on debt indices with a collective AUM of Rs 5,000 crore or more as of December 31 of each financial year.

In addition, gold ETFs, silver ETFs, and FoFs investing in gold or silver ETFs are included as well. The framework is also applicable to overseas ETFs and FoFs that are investing in a single domestic or international index or have a single underlying passive fund.

Guidelines for Launching Equity Passive Funds

SEBI also provided the guidelines for launching equity passive funds. The regulatory body stated that the index on which the passive scheme will be based should be broad-based and standardised across the industry.

Overseas ETFs or FoFs need to comply with the diversification requirement and include a minimum of 10 securities. Passive funds based on overseas equity passive indices whose quantitative threshold exceeds $20 billion will also be included under the MF Lite framework.

Under the MF Lite framework, the fast-tracking of scheme information documents (SIDs) will be mandatory. However, the fund house will not be required to file a separate Key Information Memorandum (KIM) for the respective scheme.

Passive schemes will be permitted to invest in equity, plain vanilla debt securities, and commodities. The funds can also invest in ETF commodity derivatives and equity derivatives that are part of the underlying index.

On the tracking difference (TD) under the MF Lite framework, the SEBI announcement stated, “In case of equity-oriented passive schemes, TD shall be targeted to be 50 bps (over and above actual TER charged).”