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    Home » SEBI’s New ‘MF Lite’ Rules Aim to Simplify Passive Mutual Fund Investments
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    SEBI’s New ‘MF Lite’ Rules Aim to Simplify Passive Mutual Fund Investments

    Shehnaz BeigBy Shehnaz BeigOctober 1, 2024No Comments4 Mins Read
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    SEBI's New 'MF Lite' Rules Aim to Simplify Passive Mutual Fund Investments
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    SEBI (Securities and Exchange Board of India) has approved a new framework called Mutual Fund Lite (MF Lite) aimed at making passive mutual fund investments more accessible and affordable. The new rules were passed during SEBI’s board meeting on September 30, 2024, alongside several other important regulatory updates. MF Lite is part of SEBI’s effort to make passive investments such as index funds and exchange-traded funds (ETFs) more attractive, especially to new and small investors. Here’s how SEBI’s latest move is set to change the landscape for mutual fund investments.

    What is MF Lite?

    Mutual Fund Lite, or MF Lite, is a simplified regulatory framework specifically designed for passive mutual fund schemes like index funds and ETFs. The idea behind MF Lite is to reduce the compliance burden on mutual fund companies, thus encouraging new players to enter the market. By making the regulations lighter and less complicated, SEBI aims to boost the popularity of passive investment options.

    Passive mutual funds, such as index funds and ETFs, track a market index and do not require active management by fund managers. Since these schemes are less risky compared to actively managed funds, SEBI has decided to offer a relaxed set of rules for fund houses that manage them.

    Key Features of MF Lite

    1. Simplified Regulations for Passive Funds: The new framework applies only to passive schemes like index funds and ETFs. Since these investments are based on market indices and require minimal management, the regulations under MF Lite have been streamlined.
    2. Lower Compliance Requirements: Unlike traditional mutual funds, MF Lite eliminates certain financial experience requirements, making it easier for fund houses to offer passive schemes. This opens the door for more companies, especially smaller or newer ones, to participate in the mutual fund market.
    3. Reduced Net Worth Requirement: SEBI has also lowered the net worth requirement for mutual fund companies managing passive schemes from Rs. 50 crore to Rs. 35 crore. This change will allow smaller fund houses to launch passive funds without the heavy financial burden of higher net worth requirements.
    4. Transfer of Passive Funds: Existing fund houses managing both active and passive funds can transfer their passive funds to a new entity within their group, allowing them to take advantage of the benefits offered under MF Lite.
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    How Will MF Lite Benefit Investors?

    The introduction of MF Lite is expected to offer multiple benefits to common investors, especially those seeking low-cost, simple investment options.

    1. Lower Costs for Investors: One of the most significant advantages of MF Lite is the potential for a lower total expense ratio (TER). Currently, the TER for passive funds averages around 20 basis points (bps). Under MF Lite, the fund management costs could reduce further, making these funds even more affordable for retail investors.
    2. Increased Competition and Options: With simplified rules and the entry of more fund houses, competition in the passive mutual fund space is set to rise. This will offer investors a broader range of options to choose from, helping them find low-cost funds tailored to their financial goals.
    3. Access to Equity and Debt Markets: MF Lite will provide small investors access to passive funds that track both equity and debt markets. This opens up new investment opportunities for individuals who may not have ventured into these markets due to higher costs or complexity.

    A New Era for the Mutual Fund Industry

    SEBI’s introduction of MF Lite is being viewed as the beginning of a new era in the mutual fund industry. Until now, both active and passive funds followed the same set of rules. With this latest move, SEBI has made it clear that the regulator is focused on promoting passive funds where fund managers play a limited role. This marks a shift towards a more investor-friendly environment, offering simple, low-cost investment options for all.

    The MF Lite initiative is part of SEBI’s broader strategy to enhance liquidity in the market and create more opportunities for retail investors. With relaxed compliance requirements and lower costs, SEBI hopes to encourage more participation in passive mutual funds, making them a more mainstream investment option in India.

    See also  Why Mutual Funds Are Holding Huge Cash Reserves Despite a Booming Market

    As new players enter the market and competition increases, investors will benefit from greater choice, lower fees, and improved access to passive investments. The simplification of regulations is set to make mutual funds an even more attractive option for small and large investors alike.

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    Shehnaz Beig
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    Shehnaz Ali Siddiqui is a Corporate Communications Expert by profession and writer by Passion. She has experience of many years in the same. Her educational background in Mass communication has given her a broad base from which to approach many topics. She enjoys writing around Public relations, Corporate communications, travel, entrepreneurship, insurance, and finance among others.

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