The Securities and Exchange Board of India ( SEBI ) has introduced a new regulatory structure known as the “Mutual Funds Lite ( MF Lite )” framework, effective from March 16, 2025. This initiative simplifies and encourages the growth of passively managed mutual fund schemes, such as index funds and exchange-traded funds (ETFs). All relevant rules from the Master Circular (June 27, 2024) continue to apply unless explicitly modified by this circular.
Historically, regulations for mutual funds in India have applied equally to both active and passive schemes. Recognizing that the operational and compliance needs of passive schemes are distinct, SEBI has decided to introduce a lighter regulatory regime. The MF Lite framework seeks to:
1. Requirements for Leadership Experience: To ensure experienced leadership in Mutual Funds Lite (MF Lite), the sponsor must appoint senior executives (like the CEO, COO, Chief Compliance Officer, and Chief Investment Officer) with a combined total experience of at least 20 years. This ensures the leadership team is well-equipped to manage the MF Lite operations effectively.
2. Appointment of a Chief Risk Officer (CRO): The Asset Management Company (AMC) has the flexibility to appoint a Chief Risk Officer (CRO). If a separate CRO is not appointed, the Chief Compliance Officer (CCO) can perform this role, provided they have sufficient expertise in risk management.
1. Private Equity Funds Can Act as Sponsors: Only private equity (PE) funds, among pooled investment vehicles, are eligible to sponsor an MF Lite. PEs must meet strict eligibility conditions, ensure they can sponsor such funds.
2. Eligibility Criteria for PE Funds: The PE fund must be a corporate entity established in India or abroad. It must have at least five years of experience managing funds or investments in the financial sector. The PE must have handled committed and drawn-down capital of at least INR 2,500 crore.
3. Safeguards for PE Sponsors:
To maintain stability, sponsors of an MF Lite must demonstrate financial strength: The AMC must show profitability, with an average annual profit of at least INR 5 crore over the last five years. Profitability in three of the last five years is also required.
If the total Assets Under Management (AUM) of an MF Lite AMC exceeds INR 1 lakh crore: The AMC must meet higher net worth requirements specified for larger funds. Until this requirement is fulfilled, the AMC cannot launch new schemes or accept new subscriptions.
MF Lite AMCs are required to invest their minimum net worth in safe, highly liquid instruments, such as Cash, Government securities, AAA-rated bonds without risky features.
This ensures the financial stability of the AMC and safeguards investors’ interests.
1. Conditions for Change in Control: If a sponsor acquires an existing MF Lite AMC, it must ensure that its financial position is strong enough to back the acquisition. The sponsor’s ownership stake must remain free from any pledges or encumbrances.
2. Restrictions on Borrowing for Acquisition: While sponsors can borrow funds to acquire an AMC, they must have additional unencumbered assets to support such borrowings. The minimum required capital contributions must come from the sponsor’s own resources and not from loans.
1. Registration for New Players: New players launching only passive MF schemes must register under the MF Lite framework.
2. Segregation of Active and Passive Schemes: Existing AMCs managing both active and passive funds can transfer their passive schemes to a separate AMC under the same sponsor. This ensures clear operational boundaries between active and passive fund management.
MF Lite must be established as a trust, with a trust deed registered under the Indian Registration Act, 1908. The trust deed outlines the trustees’ roles and responsibilities and ensures compliance with SEBI regulations.
The AMC board assumes primary responsibility for Risk management, Regulatory filings, Appointment of key personnel, Infrastructure adequacy, and Investor protection initiatives.
A standardized Investment Management Agreement (IMA) will be developed for MF Lite AMCs to ensure consistency in fund operations.
For MF Lite schemes: Trades executed by market makers to create or redeem fund units will not count toward broker transaction limits.
MF Lite AMCs will benefit from simplified and expedited processes for registering new schemes: Submission of separate Key Information Memorandums (KIMs) is not required.
MF Lite AMCs will submit a single Annual Report to SEBI, eliminating the need for half-yearly trustee reports. This streamlines reporting without compromising transparency.
SEBI has introduced a more streamlined and standardized format for the Scheme Information Document (SID). The simplified SID is mandatory for all passive schemes linked to the indices mentioned under Clauses 3 and 4 of the circular. This ensures uniformity, reducing the complexity of documentation for both fund houses and investors.
AMCs must allocate resources specifically to educate investors about passive schemes: Fund of Funds (FoFs) investing more than 80% in domestic passive funds are exempt from this allocation. For other passive schemes (including Overseas FoFs), AMCs must allocate 5% of the total expense ratio (TER) to investor awareness, capped at 0.5 basis points of AUM.
AMFI must dedicate at least 5% of its investor awareness budget to promoting passive funds, separate from general education campaigns.
Employees must notify their organization at least three working days before executing any securities transaction related to passive schemes. The transaction must still be reported within 7 calendar days. This rule applies to employees handling passive schemes in both existing and MF Lite AMCs, ensuring transparency and accountability.
1. Updating SID and KIM
SIDs for MF Lite schemes need to be updated within two months after the financial year ends, simplifying the process compared to the more frequent updates for other funds.
2. Portfolio Disclosures
3. Half-Yearly Financial Results
The requirement to publish unaudited half-yearly financials is removed, reducing reporting burdens. Annual Reports will continue to include detailed financial information.
Tracking Difference (TD) measures how closely a scheme’s performance matches its benchmark. Equity passive schemes must maintain a TD of 50 basis points or less, excluding TER. If the TD exceeds this limit, trustees must be informed, along with corrective actions planned by the AMC.
Section 3 introduces new regulations applicable to all Asset Management Companies (AMCs), regardless of whether they operate under the MF Lite framework or the standard Mutual Funds Regulations. These updates include the launch of hybrid passive funds, improved disclosure practices, and the introduction of close-ended debt schemes.
Hybrid funds combine equity and debt investments in a single product. They track a composite index comprising equity and debt components, offering investors diversified exposure.
AMCs can launch hybrid passive schemes in the following three categories:
Key Requirements for Hybrid Funds
Rules for Index Composition
Tracking and Transparency
What Is DIRF?
The Debt Index Replication Factor (DIRF) measures how closely a debt-oriented passive scheme replicates its benchmark index.
Calculation of DIRF: 100% replication occurs when the portfolio matches the index in terms of issuer and weightage. If there’s a mismatch, the lesser weight (or 0% for missing issuers) is considered. DIRF is calculated as the sum of all individual issuer replication percentages across the portfolio.
Disclosure Requirements: AMCs must disclose the DIRF for debt-oriented schemes alongside their Tracking Error (TE) and Tracking Difference (TD) on their website. This ensures transparency in how well the portfolio matches the index.
What Are Close-Ended Debt Schemes?
These are passive schemes with a fixed maturity date, designed to track target maturity indices.
Guidelines for Close-Ended Debt Schemes
Flexibility in Credit Ratings: While most schemes require AAA-rated instruments, close-ended debt schemes can include instruments rated investment grade, offering greater flexibility.
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