Sebi introduces MF Lite framework for passive mutual funds

Passive funds that invest solely in domestic equity indices—widely tracked by passive funds or used as benchmarks for actively managed funds—will be eligible, provided their collective assets under management (AUM) exceed ₹5,000 crore as of December 31 each year, according to the framework released by the Securities and Exchange Board of India (Sebi) on Tuesday.

Also Read: Sebi's 2025 Shake-Up: New rules for Mutual Fund Lite, derivatives, and finfluencers on the horizon

The Association of Mutual Funds in India (AMFI), in consultation with Sebi, will periodically update the list of domestic equity indices that qualify for MF Lite regulations that come into effect from 16 March 2025.

The initiative will cover a range of passive schemes, including index funds, exchange-traded funds (ETFs), and fund-of-funds (FoFs). Government securities (G-Secs), treasury bills (T-bills), and state development loans (SDL)-based debt passive funds will be included, provided they meet the ₹5,000 crore AUM threshold.

Gold ETFs, Silver ETFs, and FoFs investing in single gold or silver ETFs will be covered, but multi-index FoFs will not be part of the initial phase.

Sebi had notified MF Lite regulations on 16 December after proposing a relaxed framework with light-touch regulations for passive mutual fund schemes in July.

Eligibility under MF Lite

Equity-based passive schemes tracking overseas indices must adhere to certain standards, including diversification requirements with a minimum of 10 securities in their equity index portfolio, to be eligible under MF Lite regulations. The framework will include passive funds based on overseas equity indices with an AUM exceeding $20 billion as of 31 December each year, with AMFI and Sebi periodically updating the list of eligible indices.

Also Read: Unlisted securities: The high-stakes gamble luring India’s retail investors

For a scheme to be eligible under MF Lite, the sponsor must meet specific criteria, including experience in managing funds and a strong track record in the financial sector. 

Private equity (PE) funds are eligible to sponsor an MF Lite scheme, provided they meet certain conditions, such as having a minimum capital of ₹2,500 crore. PE sponsors must also avoid off-market transactions with their schemes or associated entities. PEs must lock in a shareholding of at least ₹75 crore for three years. Any change in sponsorship will require the new sponsor to meet these requirements.

Asset management companies (AMCs) operating MF Lite schemes must comply with specific net worth and liquidity requirements. If an AMC's AUM exceeds ₹1 lakh crore, it cannot launch new schemes or accept further subscriptions until it meets the necessary net worth criteria. Additionally, these AMCs must invest their required net worth in low-risk, liquid assets such as government securities and listed AAA-rated debt.

The MF Lite framework also introduces a simplified scheme information document (SID) format, eliminating the need for a separate key information memorandum (KIM). The SID will be updated within two months after the end of each financial year, ensuring transparency for investors.

Also Read: Setback for Burmans as court stays Religare’s AGM, RBI’s approval for open offer

The framework allows for the launch of Hybrid ETFs and index funds that combine equity and debt components in a single product. These hybrid funds will be available in three categories: balanced, equity-oriented, and debt-oriented. AMCs can launch one ETF and one index fund per category, with the funds disclosing their indicative net asset value (iNAV) at least four times a day, ensuring greater transparency for investors.