All You Need to Know About SEBI’s Mutual Fund Lite and New Asset Class Framework
October 3, 2024 Mutual Fund
The world of mutual funds is vast and ever-evolving, with regulatory bodies like the Securities and Exchange Board of India (SEBI) playing a crucial role in shaping its direction.
In its board meeting on September 30, 2024, the Securities and Exchange Board of India (SEBI) introduced two significant regulatory frameworks aimed at reshaping the mutual fund industry: the Mutual Fund Lite (MF Lite) framework and the Introduction of a New Asset Class. These initiatives are designed to broaden investor participation, reduce complexity, and bring more diversity to the investment landscape.
The MF Lite framework is a streamlined regulatory approach tailored for fund houses that focus on passively managed schemes. It reduces compliance burdens by easing requirements related to sponsor eligibility, including net worth, track record, and profitability, while also simplifying trustee responsibilities and approval processes.
SEBI’s goal is to lower barriers for new market entrants, enhance financial inclusion, and cater to risk-averse or new investors seeking simpler mutual fund options. This initiative aligns with SEBI’s broader strategy of fostering market liquidity, boosting innovation, and expanding investment opportunities for a wider audience.
Simultaneously, SEBI introduced a New Asset Class aimed at bridging the gap between traditional mutual funds and Portfolio Management Services (PMS). This new product offers greater flexibility in portfolio construction and is targeted at high-net-worth individuals with a higher risk tolerance.
Together, these frameworks signal SEBI’s commitment to driving financial inclusion and expanding the scope of India’s investment ecosystem, providing tailored solutions for both novice and seasoned investors. The goal is to simplify market entry, encourage participation from new players, reduce regulatory hurdles, increase market penetration, boost liquidity, diversify investments, and promote innovation.
What is Mutual Fund Lite?
Mutual Fund Lite intends to strip down some of the complexities that have traditionally been associated with mutual funds, such as extensive paperwork, complicated investment products, and regulatory hurdles.
The idea behind Mutual Fund Lite is to encourage participation from a larger base of retail investors, especially those who are currently underserved or are reluctant to invest due to the perceived complexities in traditional mutual funds. Through this initiative, SEBI aims to broaden financial inclusion, encouraging more people to invest in mutual funds with minimal effort.
Key Features of Mutual Fund Lite
- Simplified Processes: The Mutual Fund Lite framework reduces paperwork and simplifies the onboarding process for investors, making it easier for first-time investors to start.
- Lower Costs: One of the standout features of Mutual Fund Lite is the reduced management fees and expense ratios. This aims to make mutual funds more affordable, encouraging smaller investors to participate.
- Standardized Products: Rather than offering a wide range of funds that may confuse new investors, Mutual Fund Lite focuses on offering standardized products that are easy to understand and invest in.
- Digital Infrastructure: Mutual Fund Lite relies heavily on digital platforms for onboarding, transactions, and information dissemination. This aligns with India’s broader push toward a cashless, digitally enabled economy.
Introduction of Liberalised Mutual Funds Lite (MF Lite) Framework
On July 01, 2024, the capital market regulator SEBI issued a consultation paper proposing the implementation of Mutual Fund Lite regulations (MF Lite) for passively managed mutual fund schemes.
To know in detail about the proposed framework, you may consider reading ‘India’s Passive Fund Revolution: Decoding SEBI’s Consultation Paper on MF Lite Regulations’
After careful consideration, SEBI has announced regulations for ‘Mutual Funds Lite (MF Lite) Framework’ for passively managed schemes in its Board Meeting held on Monday, September 30, 2024.
SEBI Board Meeting PR No. 25/2024
The market regulator mentioned that, the present regulatory framework for Mutual Funds (MFs) provides for regulation of MFs and the schemes managed thereunder. While both active and passive MF schemes (such as Exchange Traded Funds (ETFs) and Index funds) are covered under the purview of the extant MF Regulations, the provisions thereunder have been envisaged, primarily keeping in mind the actively managed schemes and the risks and complexities associated therewith.
Passive funds follow a rule-based investment strategy, leaving little discretion for AMCs regarding asset allocation and investment objectives. As a result, many provisions of the existing regulatory framework are not relevant for passive schemes. To address this, SEBI approved amendments to the SEBI (Mutual Funds) Regulations, 1996, introducing the ‘MF Lite’ framework-a relaxed regulatory approach for entities launching only passive mutual funds.
The lighter regulations cover eligibility criteria for sponsors (e.g., net worth, track record), trustee responsibilities, approval processes, and disclosures. This framework aims to simplify market entry, attract new players, reduce compliance, boost market liquidity, diversify investments, and promote innovation.
As per SEBI, existing AMCs offering both active and passive schemes can either transfer passive schemes to a separate group entity or continue managing them under the same AMC. In the latter case, the relaxed regulations for passive schemes under the MF Lite framework will still apply.
Introduction of Regulatory Framework for a New Investment Product/Asset Class
In a consultation paper dated July 16, 2024, the capital market regulator proposed the introduction of a New Asset Class for investors. This new investment product is designed to bridge the gap between mutual funds and Portfolio Management Services (PMS), offering greater flexibility in portfolio construction.
What is SEBI’s New Asset Class?
The new asset class addresses a growing demand from investors who feel limited by the traditional options of mutual funds and PMS. Mutual funds, while offering diversification and professional management, often lack the customization that some investor’s desire. PMS, on the other hand, requires a large capital commitment, which many retail investors cannot afford.
Key Features of New Asset Class
- Hybrid Management Structure: The asset class will combine the fundamentally diversified approach of mutual funds with the active management strategies of PMS, giving investors a balanced solution that optimizes both risk and returns.
- Lower Entry Barriers: Unlike PMS, which typically requires a minimum investment of Rs 50 lakh or more, the new asset class will have a lower entry threshold, making it accessible to a larger pool of investors.
- Customizable Portfolio: One of the major draws of this new asset class is the greater degree of customization.
- Active and Passive Fund Management: The asset class will feature a mix of actively managed and passively managed investments.
- Risk-Adjusted Returns: With its dual focus on risk management and performance, the new asset class will prioritize delivering risk-adjusted returns.
This new product is positioned to serve as a middle ground, providing more tailored management without the high entry barriers of PMS. In order to understand the proposed New Asset Class framework, you may consider reading our exclusive article ‘Will SEBI’s ‘New Asset Class’ Proposal Be Worthwhile for You’
On September 30, 2024, the Board approved amendments to SEBI (Mutual Funds) Regulations, 1996 (‘Regulations’) for the introduction of a new investment product under the existing Mutual Fund framework.
SEBI Board Meeting PR No. 25/2024
The new product is designed to provide investors with a professionally managed, well-regulated offering that delivers greater flexibility and accommodates higher risk-taking for larger ticket sizes, while ensuring appropriate safeguards and risk mitigation measures. These safeguards include no leverage, no investments in unlisted or unrated instruments beyond those allowed for Mutual Funds, and limiting derivatives exposure to 25% of AUM, except for hedging and rebalancing purposes.
The offerings under this product will be termed ‘Investment Strategies,’ clearly distinguishing them from traditional Mutual Fund schemes. The minimum investment requirement is set at INR 10 lakh per investor across all strategies within a particular AMC. This product aims to diversify and enrich the investment landscape by introducing a new asset class.
By launching a new asset class, SEBI is pushing for innovation in India’s financial markets. The product allows fund houses to develop new strategies, combining passive and active management to cater to evolving investor needs. This innovation could further strengthen India’s capital markets, making them more attractive to domestic and international investors.
SEBI’s New Framework: What’s in It for Investors?
By allowing for a more simplified and accessible investment approach, Mutual Fund Lite aims to cater to a wider range of investors, particularly those who may have found conventional mutual funds overwhelming or unsuitable for their needs. This regulation is expected to democratize investment opportunities and encourage greater participation in the mutual fund ecosystem.
For investors, the Mutual Fund Lite framework presents several potential benefits. First and foremost, it simplifies the investment process, making it easier for new and inexperienced investors to enter the market. MF Lite framework is designed to have lower minimum investment thresholds and fewer regulatory complexities, enabling more individuals to start their investment journey without feeling intimidated. This accessibility can lead to an increase in retail participation, fostering a culture of savings and investment among the masses.
Moreover, the introduction of a new asset class under the Mutual Fund Lite framework offers diversification opportunities that were previously unavailable. Investors will have access to a broader range of investment products that can be tailored to their risk appetite and financial goals. This flexibility allows them to build more balanced and resilient portfolios, potentially enhancing their overall returns.
Additionally, the new asset class may include innovative investment strategies that could capitalize on emerging market trends, providing investors with opportunities to benefit from sectors that were traditionally less accessible.
Another crucial aspect of the Mutual Fund Lite regulation is its emphasis on investor education and awareness. SEBI’s initiative encourages mutual fund houses to develop educational resources and tools that empower investors make informed decisions.
By enhancing financial literacy, investors can better understand the products available to them and align their investment choices with their financial objectives. This empowerment can lead to more confident investment decisions, ultimately contributing to their long-term financial well-being.
This article first appeared on PersonalFN here
