SEBI winds up investing in passively managed mutual funds for a simple framework
The Securities and Exchange Board of India (SEBI) is drawing up a consulting paper for the setting of regulations for these passively managed mutual funds schemes, hence the birth of ‘Mutual Funds Lite Regulations’ (MF Lite). This tells that change could be expected in the regulatory environment for the Indian mutual fund industry.
Justification of MF Lite:
It is logical that passively managed options like Exchange Traded Funds (ETFs) or Index Funds should have lower risk by nature, since they just replicate a given index.
SEBI has sought to achieve a more simple regulatory regime for MF Lite to:
Make life easier for fund houses on compliance.
Innovate the development of passive investment products.
Make it easier for new players who are focused strictly on passive investing.
Key Proposals:
Relaxed Entry Criteria: The consultation paper has proposed reducing the minimum net worth and profitability requirements for the registration of AMCs under MF Lite.
New Product Categories: SEBI is also thinking of new “hybrid passive” schemes mise offering pre-defined debt-equity ᅳ say a 75% debt and 25% equity ᅳ ratio. Customizing features help increase investment choices for investors in the passive space.
Investor Friendly: The MF Lite regulations are expected to be more relaxed when compared to the current framework for regular mutual funds. This is potentially going to make savings for the investor in the form of fees and in many other ways.
Potential Impact:
Increasing competition in the passive fund space will drive fees that investors pay lower.
Make passive investing more accessible to a broader range of investors.
Potential for innovation by creating new products for passive investing.
Considerations and Concerns:
It needs to be analysed very closely for the potential impact on investor protection if regulations are relaxed.
A strong swing in investor taste toward passive options threatens to eat into the market share of actively managed funds.
Looking forward:
The SEBI MF Lite proposal is a vital landmark development for the scheme of mutual funds in India. Presently, stakeholders have been called for on the consultation paper for their comments. How MF Lite regulations are ultimately finalized and subsequently implemented would hold the key to its overall impact with respect of changing the market reality.
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