What is the difference between passive and active funds?
Passively managed MF schemes replicate an underlying index like ETFs and index funds where portfolios of index funds can be easily tracked.
Active fund schemes require expert fund managers who define investment philosophy and select securities.
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Accordingly, various provisions of the existing regulatory framework may not be relevant for passively managed schemes, a relaxed framework with light-touch regulations has been approved as MF Lite Regulations for passive MF schemes.
Under this, MFs desirous of managing only passive schemes (like Exchange Traded Funds and Index funds) should be covered under the MF Lite Regulations.
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Key Changes:
- Relaxed Eligibility Criteria: Sponsors will face less stringent requirements in terms of net worth, track record, and profitability.
- Simplified Approval Process: The approval process for launching passive mutual fund schemes will be streamlined.
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Reduced Disclosure Requirements: Compliance requirements will be eased, reducing the burden on fund houses.
Objectives:
- Ease of Entry: The MF Lite framework aims to make it easier for new players to enter the mutual fund industry.
- Increased Penetration: By reducing barriers to entry, SEBI hopes to increase the penetration of mutual fund products.
- Enhanced Liquidity: A larger number of players in the market can contribute to increased liquidity and competition.
- Investment Diversification: A wider range of passive fund options can provide investors with greater diversification opportunities.
- Innovation: The simplified framework can foster innovation and the development of new passive fund products.
This simplified approach aims to boost market participation, increase investment options for investors, and improve liquidity in the mutual fund space.
Key Provisions of MF Lite Framework:
- Separate Entity Option: Existing AMCs with both active and passive schemes can choose to hive off their passive schemes into a separate entity.
- Relaxed Requirements: Passive schemes under MF Lite will be subject to relaxed disclosure and other regulatory requirements.
The mutual fund industry in India has witnessed a phenomenal surge in the past decade, with assets under management (AUM) growing over seven times to Rs 61.2 lakh crore in June 2024 from from Rs 8.3 lakh crore in December 2013. A recent study by Motilal Oswal Asset Management Company (MOAMC) titled “Where the Money Flows” reveals that Passive Funds AUM has grown to Rs 10.2 lakh Crore with 17% of total market share, while AUM of Active Funds stands at Rs 50.9 lakh crore, as of June 2024.
First Published: Oct 01 2024 | 10:34 AM IST