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Introduction of a Mutual Funds Lite (MF Lite) Framework

The mutual fund landscape in India is witnessing a strategic shift with SEBI’s latest initiative tailored to the needs of passive investing. By introducing this framework, SEBI aims to encourage new players, reduce compliance requirements and increase market penetration.

What is the MF Lite Scheme?

SEBI has introduced a regulatory framework called “MF Lite,” designed for passively managed mutual fund schemes.  The MF Lite framework for funds is designed with a “light touch” approach to reduce entry barriers, ease compliance and promote passive investing. This framework was made effective from March 16, 2025.

What Types of Funds are Included?

MF Lite will initially cover specific types of passive funds, including[1]:

  • Equity Index Funds and ETFs, tracking permitted indices.
  • Debt Index Funds and ETFs investing in government securities (G-Secs), treasury bills (T-bills) and state development loans (SDLs).  
  • Gold and Silver ETFs (Exchange Traded Funds) and FoFs investing in them.  
  • Certain Overseas ETFs, subjected to the permitted list of indices. 
  • FoFs investing in a single domestic or overseas index, where the underlying passive funds track benchmarks.

Note that FoFs investing in more than one index shall not be covered under the MF Lite framework under the phase 1 of implementation.

SEBI Introduces MF Lite Framework for Passive Funds to Ease Investing

The framework aims to simplify the regulatory landscape for passive fund management by:

  • Making it easier for new entities to enter the passive investment space of Mutual Fund
  • Minimising regulatory and procedural burdens
  • Standardising legal documentation such as trust deed and investment management agreement
  • Simplifying the overall disclosure and compliance process

The framework provides detailed  guidelines on MF Lite, its eligible sponsors, capital requirements, networth deployment and acquisition of Asset Management Companies (AMCs). 

Objectives of the MF Lite Framework

The primary objectives of the SEBI MF Lite framework are[1]:

  • Promote ease of entry: By easing regulatory hurdles SEBI aims to encourage new players to enter the passive fund management space. 
  • Encourage new players: The relaxed regime makes it viable for new entities to launch passive mutual fund schemes without the full regulatory burden of active fund management. 
  • Reduce compliance requirements: Lower compliance burden makes passive fund management more economical. 
  • Increase penetration: By making passive funds more accessible to both fund houses and investors, SEBI hopes to increase market penetration. 
  • Facilitate investment diversification: A variety of passive investment options helps investors diversify their portfolios more effectively. 
  • Foster innovation: The lighter regulatory touch allows for more experimentation and innovation in passive fund structures and offerings. 

How will MF Lite Be Beneficial for Investors?

The MF Lite framework brings several advantages for investors looking at SEBI passive mutual funds for their investment needs[1]:

  • Simplified disclosures: The framework introduces a simplified Scheme Information Document (SID) format for passive schemes, making it easier for investors to understand fund offerings.
  • Introduction of hybrid passive funds: Investors can now access hybrid ETFs/Index funds that combine equity and debt exposure in a single product, simplifying asset allocation. 
  • Enhanced transparency: Requirements like disclosure of “Debt Index Replication Factors (DIRF)” for debt-oriented passive schemes provide investors with better insights into how closely a fund tracks its underlying index. 
  • Better tracking of performance: Standardised tracking difference (TD) metrics help investors assess the effectiveness of index replication. 
  • Focused investor education: AMFI will allocate a minimum of 5 percent of investor awareness funds specifically for educating about passive funds, which should help investors in understanding these products. 

Conclusion

The SEBI MF Lite 2025 framework marks a significant regulatory refinement in how passive investment schemes are governed in India. By tailoring compliance and governance norms to the specific nature of passive schemes, SEBI is paving the way for a more efficient and focused regulatory approach that supports the future growth of passive mutual funds. Whether you are a seasoned investor or new to investing, understanding MF Lite and exploring MF Lite funds for long-term investing may help you build a diversified investment portfolio.   

Source

[1] SEBI

Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

Published on May 27, 2025

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