Passive Mutual Funds: SEBI's Proposed MF Lite Rules Explained
SEBI has proposed to make it easier for companies to launch passive-only mutual fund houses.
In a bid to propagate wider adoption of low-cost mutual fund investments, the Securities and Exchange Board of India has proposed relaxed guidelines for institutions intending to launch passively managed mutual fund schemes.
A consultation paper on MF Lite Regulations released on Monday caters specifically to players that plan to exclusively launch passively managed schemes.
"Considering the lesser risk inherent in managing passively managed mutual fund schemes, the proposed MF Lite Regulations intend to reduce the compliance requirement, foster innovation, encourage competition and promote ease of entry for the MFs interested in launching only passive schemes," the markets regulator said.
What Does MF Lite Propose?
SEBI has proposed to make it easier for companies to launch passive-only mutual fund houses. It has proposed reducing the net-worth requirements to launch such a mutual fund. The qualification for this type of mutual fund has been divided into two broad routes — the main eligibility route and the alternate eligibility route.
In the main eligibility route, the minimum net-worth requirement for an asset management company has been set at Rs 35 crore, down from the Rs-50 crore requirement for mutual funds offering both active and passive schemes.
Similarly, in the alternative route, where the sponsor of the mutual fund does not meet the eligibility criteria of the main route, the minimum net-worth requirement has been set at Rs 50 crore, down from Rs 75 crore for traditional mutual funds.
Sponsors who register under the MF Lite regulations will also have relaxed regulations that govern net worth and relevant experience, as well as a few other areas.
Mutual fund houses that currently offer both active and passive funds have the option of using MF Lite too. They will be required to hive off their passive business and register it separately under the proposed regulations.
Increased Adoption Of Passive Strategies
The Indian mutual fund industry continues to be dominated by actively managed strategies, but passive mutual fund schemes have been making inroads over the past few years, particularly in the large-cap category.
The biggest advantage to investors in these schemes is the lower cost. The average total expense ratio in such schemes stands as low as 20 basis points. The expense ratio is described as a percentage of net asset value and is the cost borne by an investor when investing in a mutual fund scheme.
Actively managed schemes can have expense ratios above 1.5%.
