Markets regulator the Securities and Exchange Board of India (SEBI) has proposed the introduction of mutual fund (MF) Lite regulations aimed at passive funds, as per its annual report 2022-23.
The idea is to ensure a reduction in compliance requirements and provide a push for innovation in the passive fund sector.
Passive funds, which include index funds, Exchange-Traded Funds (ETFs), and Fund of Funds (FoFs) investing in ETFs, are known to mirror benchmark indices or specific market segments. The markets regulator’s current mutual fund regulations cater to active fund management.
The proposed MF Lite regulations for passive funds would tie investment decisions to changes in the underlying benchmark indices, leading to a reduction of compliance requirements and driving innovation in this sector.
Traditional mutual funds, catering to the general public, are mandated to comply with numerous regulations.
Considering that the investment decisions are at the discretion of fund managers and to gain the trust of small investors, these have stringent requirements. including a high Asset Management Company’s (AMC) net worth and an experienced fund management team, among others.
However, for mutual funds with a focus on passive investments such as ETFs and index funds, a regulatory framework that is low on compliance demands is timely.
As per its annual report, the markets regulator has pointed out that current regulatory rules related to mutual fund scheme fees and expenses would be reviewed in an effort to encourage participation, control cross-subsidisation, and counter malpractices.
In May 2023, SEBI issued a consultation paper while putting forward comprehensive changes to the total expense ratio of mutual funds, which encompasses fees and expenses charged by AMCs.
The markets regulator remains focused on facilitating financial inclusion in the securities market while leveraging technology to make financial products accessible across the country, at the same time maintaining risk management and prudential norms.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.