Mutual Fund Lite

Context:

Securities and Exchange Board of India (SEBI) has introduced liberalized Mutual Fund Lite (MF Lite) framework for passively managed schemes.

Objective of MF Lite:

• To promote entry of new players in the MF ecosystem
• To offer diversified investment options to retail investors through low-risk schemes
• To enhance liquidity in the market

Need for MF Lite framework:

• Passively managed mutual fund schemes are considered less risky than actively managed mutual fund schemes.
• They generally offer dividends based on a benchmark index such as the BSE Sensex or Nifty 50.
  • Passively managed schemes can be easily tracked as the underlying components of the benchmark index are publicly available.
• According to SEBI, the investment strategy of passive funds is based on instruments with already established rules.
  • As such, the asset management companies (AMCs) of the fund have "negligible discretion" with respect to asset allocation and investment objective.
• SEBI observed that the existing framework is primarily for active mutual fund operators and is not relevant for passively managed schemes.
• The latest regulations will include relaxed requirements for sponsors (who set up and register mutual funds) related to eligibility criteria such as net worth, track record and profitability.

Help in the entry of new stakeholders:

Governance structure:

• According to SEBI, the monitoring role of trustees (job of protecting the interests of investors) is also significantly reduced in the management of passive funds.
• The new framework stipulates that the role of trustees along with the AMC will still be relevant in preventing conflict of interest and monitoring related party transactions, undue influence of sponsors, misconduct including market abuse and misuse of information including front running.
  • However, certain monitoring measures related to day-to-day operations such as ensuring fairness in fees and expenses charged, and maintaining tracking error and variance within regulatory limits will now be entirely under the purview of the AMC board.

Requirements for Net Worth Holdings:

• Net worth is the difference between the assets and liabilities of the fund. The framework prescribes a minimum net worth criterion of ₹35 crore for AMCs operating passive funds.
• Emphasising on liquidity, SEBI has underlined the need for the fund to invest the entire amount of net worth in liquid assets on a sustainable basis.

 Provisions regarding Risk and Disclosures:

• Under the latest framework, SEBI has also directed to inform the prospective investor about the underlying benchmark among other things in the Scheme Information Document (SID).
  • The SID contains all the relevant information for the prospective retail investor.