According to experts, asset managers choosing this recently proposed path to enter the mutual fund (MF) industry have limited opportunity for innovation due to the stringent product launch requirements under the MF Lite framework.
Because the Securities and Exchange Board of India (Sebi) has set a Rs 5,000 crore requirement for domestic indices to qualify for product launches, MF Lite companies are only permitted to offer products in well-known passive categories during phase one.
The framework stipulates that passive funds with an aggregate asset under management (AUM) of more than Rs 5,000 crore must already be included in an index.
The AUM of these active schemes will also be included for indexes that are used as the main benchmarks for active schemes.
"Fund houses' ability to provide unique products is severely limited by the MF Lite license constraint, which permits them to introduce only passive schemes linked to indices with an AUM of more than Rs 5,000 crore." According to Jidesh Kumar, managing partner at King Stubb & Kasiva, Advocates & Attorneys, "it restricts them to replicating strategies tied to well-established indices, leaving little room for innovation or niche products tailored to emerging themes like ESG (environmental, social, and governance) or tech-focused sectors."
The introduction of exchange-traded funds (ETFs) and diversified index funds will also be hampered by the Rs 5,000 crore AUM requirement. A senior MF executive stated, "It doesn't make sense to add the AUM requirement given that the industry already has norms around diversification and other measures to protect investors."
Investors currently have access to such schemes, whether they are MF Lite or not. The standards should be the same for both frameworks if the goal is to prevent investors from receiving certain schemes," he continued.
Only ten indexes, with a combined AUM of more than Rs 5,000 crore, are now followed by passive funds. Nifty 50, Sensex, Bank Nifty, Nifty Next 50, and Nifty 200 Momentum 30 are a few of these. Since they serve as the main benchmarks for numerous active funds, a few sectors indexes, including those in the information technology, pharmaceutical, and healthcare industries, might be eligible.
At the conclusion of each year, the list of qualifying indices is released by the Association of Mutual Funds in India (Amfi).
Debt offerings are subject to the same requirements. The AUM threshold for overseas funds is $20 billion.
"The indices that can be used to start passive schemes abroad must be broad-based and industry-standard. The diversity criterion of at least 10 stocks in an equity index portfolio must be met by overseas ETFs/index funds and fund of funds (FoFs) investing in overseas ETFs/index funds, according to a circular issued by Sebi on Tuesday.
For players who only provide passive funds, the regulator has loosened regulations.
Only passive mutual fund schemes will be subject to the MF Lite Framework, a lenient system with light-touch regulations. The goal is to facilitate investment diversification, encourage new participants, lower compliance requirements, boost penetration, ease entry, improve market liquidity, and stimulate innovation," it stated.
