Criteria for passive mutual funds to be eased, Sebi proposes in a consultation paper. Details here

The capital markets regulator Securities Exchange Board of India (Sebi) has introduced a consultation paper for introduction of mutual fund lite regulations (MF Lite) for passively managed mutual funds schemes.

The key purpose of this paper is to solicit comments from the public on the proposals related to introduction of a relaxed regulatory framework in the Mutual Funds (MF) segment for the passively managed MF schemes.

Investment in passive schemes

Mutual fund houses are allowed to launch equity and debt oriented passive schemes based on equity and debt indices only. It was deliberated that underlying securities in which passive schemes invest may be equity, debt securities, physical commodities and exchange traded commodity derivatives.

Further, the working group was of the view that investment in equity derivatives of underlying securities comprising part of the index may also be available as an investment option in case the underlying security is not available for purchase. However, investments in bespoke debt securities and debt derivatives may not be allowed.

Passive mutual funds may not be allowed to invest in unlisted debt instruments, bespoke or complex debt products, securities with special features, inter scheme transactions, short selling, derivatives (except for portfolio rebalancing) and unrated debt and money market instruments.

Hybrid schemes

There will be three sets of hybrid passive schemes with the following features:

1. Debt oriented: These schemes will have 75 percent allocation to debt.

2. Balanced: These funds will be 50-50 allocation to debt and equity.

3. Equity oriented: These funds will have 75 percent allocation to equity and 25 percent to debt.

A mutual fund will launch a maximum of one scheme per category of hybrid funds.

The regulator also specified that the minimum subscription amount at the time of new fund offer for hybrid ETFs and index funds will be ₹10 crore.

Close-ended debt schemes

The markets regulator Sebi has also proposed to introduce close-ended debt-passive schemes.

Currently, there are target maturity debt passive schemes which are open ended as the investors may subscribe or redeem any time during the fund's lifetime but the regulator has proposed to launch close-ended debt passive schemes as well.

Hybrid ETFs/ index funds will disclose the tracking error (TE) and tracking difference (TD) for both equity and debt components of the portfolio and the underlying index.

Uniform approach on overseas indices

The markets regulator has also proposed in the consultation paper that a uniform approach may be applied to standardise the overseas indices on which ETFs or fund of funds (FOFs) may be launched.